Addressing Regulators Concerns On Limited Pay LTC Insurance
Second of Two Parts
Regulators concerns regarding long term care insurance generally fall into the following areas:
Solvency. Regulators greatest responsibility is to take reasonable steps to try to assure that insurers will be able to pay claims.
Disclosure. If buyers do not understand what they are buying, they may be exposed to unexpected risks or greater risks than they anticipated.
Suitability. Buyers might purchase a policy that is inappropriate for them.
Equity. Is one group of policyholders unfairly exposed to subsidizing another group of policyholders?
Affordability. Improving affordability can help more secure the LTCI they desire.
Now lets look at these issues as they concern limited pay (LP) LTCI policies.
Solvency concerns differ for limited pay policies because the premium increase safety valve is restricted. Solvency is best addressed by assuring that LP LTCI is not underpriced and does not dominate the insurers business, as well as requiring adequate reserves and risk-based capital. None of these factors requires that policy configuration be restricted.
Any risk of a premium increase after a policy entered a “vanishing premium” “paid up” status would be a major disclosure concern. Fortunately, vanishing premium LTCI policies are disappearing from the market (some states forbid them). When a policy is truly “paid up” at the end of the premium-paying period, disclosure concerns focus on the risk of premium increases during the premium period (not applicable to single premium policies), and what happens if the policy terminates due to death or lapsation.
Past regulator efforts to disclose the risk of premium increases for lifetime premium policies also apply to the LP LTCI market. Different disclosure wording might be appropriate for LP LTCI policies, most particularly because the risk disappears when the policy becomes paid-up. Disclosure is a preferred regulatory approach because it does not restrict the consumers right to purchase the policy configuration of his or her choice.
Clearly, proper disclosure is critical regarding whether any premium will be returned, directly or indirectly, upon lapse or death.
Suitability applies similarly to LP LTCI and to lifetime pay LTCI. Applicants and agents should design a policy suitable for the particular prospect. Many states have mandated usage of a Suitability Statement, which asks applicants and agents to consider the clients financial ability to continue to pay premiums, especially in the face of a 25% rate increase.
Suitability statement wording may work even better for LP than for lifetime premium. A 25% rate increase on LP would be higher than a corresponding increase on a lifetime premium, and it is likely to be easier to judge the ability to pay a 10-pay premium for the next 10 years than a lifetime premium for the next 30 (or more) years.
Regarding equity, LP policyholders may be (largely) immunized from a rate increase because their policies might be (nearly) paid up if an increase were to occur. As a result, people with lifetime premium periods could conceivably end up with a larger premium increase, subsidizing the LP policyholders.
Some carriers concluded that it is unfair to subject lifetime premium policyholders to such risk. So they established separate blocks of business, for potential rate increase purposes, for 10-pay policies vs. lifetime premium policies, for example. Hence, if the 10-pay block experienced adverse results but had too little premium period left to collect enough additional premium, the lifetime premium policyholders were protected from a cost-shifting impact.
As regulators have become more aware of the issue, they have increasingly asked insurers to explain how the LP business would affect future rate increases, if any were to occur, for lifetime-paying policyholders. Some states have required separate classes to be established.