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LTC Reserving Project Starts At NAIC

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As the starting point of a discussion on long term care reserving, regulators wondered how three different actuarial reserving assessments for long term care insurance for one company could vary by $200 million and still all be within the letter of the law.

That question and the discussion that ensued point to the need to quickly establish focused reserving standards, said regulators at the spring meeting of the National Association of Insurance here.

Regulators were joined by insurers and actuaries as a project to develop reserving guidelines gets under way. The project, as discussed, takes a two-part approach: first, reviewing the current requirements in the Health Insurance Minimum Reserves Model Regulation for possible changes; and then, developing longer term actuarial standards to ensure there is proper reserving.

The issue has become visible because the long term care market is coming of age and with 10-15 years of “credible experience,” there is now enough data to work on creating proper reserving standards, says Mike Abroe, who addressed regulators as a representative of both the American Academy of Actuaries, Washington, and the Society of Actuaries, Schaumburg, Ill.

One of the challenges of the project is to find a way to integrate current with emerging experience in the long term care market, he explained. At present, current assumptions are not tied to emerging issues, Abroe said.

As work progresses, assumptions that need to be examined include morbidity and mortality experience as well as lapse rates and discount rates, he continued.

Indeed, the Academy is examining the model regulations requirements in areas including persistency, morbidity and expected claims assumptions.

Morbidity assumptions are an area of particular concern for regulators, according to discussions held at the NAIC, which referenced Penn Treaty Network American Insurance Company, Allentown, Pa., for its “aggressive use of morbidity assumptions.” The issue of three different actuarial assessments for the companys reserving was also raised.

However, it was also noted that regulators are aware of only three companies using such assumptions and that “most in the industry are not convinced it is appropriate,” said John Hartnedy, an Arkansas regulator.

“We have included a small degree of morbidity improvement in our current reserves. We do this as a result of numerous Society of Actuaries and market studies that suggest morbidity improvement of 0.7% to 2.5% annually,” said Penn Treaty Executive Vice President and CFO Cameron Waite in a March 10 response requested by National Underwriter.

“Our own recent historical experience has also supported this,” he added.

However, “we and other companies also recognize that current experience has increased over those assumptions employed in pricing, particularly from older policies written. This seems to have occurred due to the increase in assisted living facilities, which we have
always covered regardless of when the policy was issued.”

On the issue of reserving, Waite explained that “as you would guess, with 120 companies in 50 states, there is a lack of objective consistency in reserving methodology While we surpass all states requirements, we have been surprised to see the number of differences required in reserve certification in many states. We have seen reserve requirements a) based upon current claim assumptions that may have changed from time of original pricing, but do not allow for the inclusion of new premium rate increases; b) the incorporation of filed/pending rate increases, but with no recognition of morbidity improvement; and c) a gross premium valuation (bare minimum
economic value of the business) coupled with some level of margin.”

However, Frank Dino, a Florida regulator, asserted that assuming morbidity improvement is “inappropriate” because if used aggressively it can have a “material impact” on a companys reserving even though it is not certain that there will be continued morbidity improvement in the future based on what is happening today.

For instance, Dino said the improvement in health is due in part to the improvement in health coverage. However, in a depressed economy with higher unemployment, it can not be assured that such health coverage, and thus, improvement in health, will continue, he added.

Reserving assumptions are especially important in the long term care market, according to Dino, because of the significant risk and volatility that can be tied to selling LTCI. There are companies that thought they had priced right and had to seek premium increases, he added.

And, as Bill Weller, an Academy representative, noted to regulators, looking ahead, it is not certain how LTC and pharmacy benefits will be delivered.

Persistency assumptions also need to be looked at, said Hartnedy. Although data needs to be culled, Hartnedy said lapse rates of 4% and even 8% in at least one case may be too high and that a lower 2% rate may be more realistic. The reason, he continues, is that LTC is a product that consumers may well be more likely to keep in force to protect themselves in old age.

Consequently, he said, examining assumptions so that there are not significant rate increases for consumers in their 70s and 80s is important. “When people buy these policies, they are contracts that they keep.”

How fast a LTC reserving work product will be delivered this year is still under debate, with regulators considering waiting until all data is available against putting out an initial document for the summer NAIC meeting in June. But Hartnedy said a final product should be completed in 2004.

Reproduced from National Underwriter Edition, March 17, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.