Regulators could shake up LTCI reserve rules

Actuaries are running blocks of thousands of LTCI policies through a stochastic testing model. (AP photo/Bernd Kammerer) Actuaries are running blocks of thousands of LTCI policies through a stochastic testing model. (AP photo/Bernd Kammerer)

Insurance regulators are talking about whether they can, and should, use a flexible, complicated new approach to analyzing how much money insurers should reserve to support long-term care insurance (LTCI) policies.

Two arms of the National Association of Insurance Commissioners (NAIC) — the Long-term Care Actuarial Working Group and the working group's parent, the Health Actuarial Task Force — looked at the idea of using "principles-based reserving" (PBR) for blocks of LTCI business earlier this week in Louisville, Ky., at the NAIC's summer meeting.

Al Schmitz and Paul Morrison of the American Academy of Actuaries have developed a demonstration model that helps actuaries analyze how LTCI reserves might perform when the likelihood that the insureds will file claims and the likelihood that the insureds will keep their policies change in a random way. The actuaries have also been working to build changes in interest rates into the model.

The LTC Actuarial Working could rate developing PBR requirements for LTCI as an important job in its list of 2015 charges. The current list of charges calls for the working group to start developing a PBR system for LTCI products.

The NAIC and its members are already applying PBR methods to life insurance.

When a company sets reserve levels the traditional way, an actuary typically uses one set of equations to estimate how much cash the insurer might need to handle policy obligations under good, bad and ordinary conditions, then uses those estimates to set reserve levels. 

When a company uses a PBR approach to analyze the reserve needs for a block of business, it hires actuaries to develop sets of equations, or models, that show how the block might perform in a given scenario. The actuaries then use computers to do "stochastic testing," or testing of how the block might perform in a large number of randomly generated scenarios.

In theory, a shift to the PBR system in the LTCI market could change the amount of reserves insurers set aside for their LTCI business. Reserve system changes could free up cash insurers could use to cut premiums or pay dividends to shareholders, or force insurers come up with the cash to increase their LTCI reserves.

Critics of the PBR approach say some insurers might use flexibility to skimp on reserving. Supporters of the new approach say it will help insurers get a better understanding of the risks they face.

See also: NAIC Panels Discuss LTC Morbidity Project, PBR Valuation Manual Section.

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