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Writing The Rx For LTCI

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Work continues to update regulation

by Jim Connolly

Long term care insurance continues to have growing pains, and diverse opinions are being voiced over how to bring the product to full maturity.

A forum for these voices is being offered as regulators seek to update the Long Term Care model act and regulation developed by the National Association of Insurance Commissioners, Kansas City, Mo.

As reported earlier, two commissionersJorge Gomez of Wisconsin and Kevin McCarty of Floridacaused a stir during the spring NAIC meeting when they raised the issue of whether the product should continue to be sold at all (see NU, March 21). Their remarks followed a presentation on post-claims underwriting by Paul Roller, an attorney who has represented a plaintiff in such a case.

National Underwriter spoke to both commissioners, who expanded on their comments at the meeting.

The ongoing discussion, according to Gomez, will prompt regulators to take a closer look at contestability issues.

He says the presentation by Roller speaks to the need for better underwriting and for better pricing. Poor underwriting and poor pricing are factors that can lead to post-claims underwriting, he says.

Gomez says his reaction at the meeting was in response to “an unnecessarily hostile reaction” to Rollers remarks.

He notes that there are still rate increases but that the large increases of 20-70% are generally from older blocks of business written prior to 2000.

However, he adds, people should not be induced to buy insurance that appears affordable and then have to look at a 50% hike. This is particularly important for the elderly on a fixed income, Gomez adds.

“Good underwriting and pricing mechanisms are fundamental tenets for products,” he says, and thorough underwriting provides better data for actuaries. Better underwriting is important, even if it results in fewer people buying the product simply because the price is right, Gomez adds.

Previous assumptions such as return on investments, medical inflation and interest rates have been misjudged, he says. “I really do suspect that they may have sold more insurance than is warranted” and assumed “more risk than should have been undertaken,” says Gomez. “It is better to have cleaner underwriting upfront.”

The need for better underwriting becomes more important, particularly with medical inflation and an aging population, Gomez says. “Regulators are responsible for making sure the product will be around in the future.”

In cases of post-claims underwriting, he adds, an external review process could be created and as the current version of the model is reviewed, the exclusion of mental health also may be examined.

Floridas McCarty expresses concerns about “the suitability and viability of the product.”

He recalls hearings in Florida last year in which Conseco Inc., Carmel, Ind., requested increases in excess of 200%. The average age of policyholders in Florida is over 80 and they are not in a good position to bargain with an insurer, McCarty says.

Carriers may have concerns about the misstatement of an individuals health as noted during the discussion on post-claims underwriting and the length of contestability periods. But consumers were led to believe that LTCI would be a stable product and, instead, they got large rate increases, McCarty notes.

Since rate stability requirements have been put in place, sales are down, he adds. Both the number of policies and the number of carriers in Florida have dropped because LTCI has had “a much higher price and is not seen as a good buy,” McCarty says.

He does note, however, that new rate stability requirements may have some positive impact, and “insurance companies and regulators have learned a lot” since the product was first offered.

McCarty favors incontestability periods that are in place for a reasonable time such as the two-year period that is standard for life products.

However, in Florida, LTC, which is considered a health product “even though it is really a financial planning tool,” has an unlimited incontestability period. This can increase the possibility of post-claims underwriting, he explains.

In the case detailed by Roller, an Alzheimers patient with an LTC policy was denied care long after the incontestability period had passed because of a remark made to his physician about becoming forgetful. The issue discussed by the group was how long an incontestability period was fair.

McCarty says the current LTC model is a good one and that work to amend it further will help solve problems in the market.

In addition to work on post-claims underwriting, work also needs to be done on reporting requirements and agent behavior, says Bonnie Burns, an NAIC funded consumer and a training and policy specialist with California Health Advocates, Scotts Valley, Calif.

For instance, she explains, if companies are rescinding policies but are not noting those recisions in annual statement filings, then there could be a market conduct issue. Multi-state exams may be a way to uncover potential market conduct problems, she says.

In his discussion, Roller covered the issue of recisions and whether or not they are being properly noted in annual statement filings.

While “companies may have legitimate concerns about the intent to commit fraud,” the length of a contestability period cannot be unreasonable, she adds. And, a consumer needs a way to challenge an “unreasonable” allegation of fraud, Burns continues.

The American Council of Life Insurers has been part of the work on long term care regulation since the first model was developed in 1986 and will continue to be part of any additional effort, says Lynn Boyd, director of long term care issues with the trade group, based in Washington.

She notes that 26 of 50 states have adopted the current version of the LTC model with rate stability changes (see chart).

The ACLI is willing to work to get that model adopted in the remaining states, she adds. With the current Medicaid budget crisis and “70 million baby boomers coming down the track like a freight train” there is a real need for the product to be sold, according to Boyd. There is support from both Congress and state governors, she continues.

In addition to the 26 states noted by ACLI, Oregon recently adopted LTCI rules that seek to “correct problems that have arisen in long term care policies sold over the last 20 years.”

Among the Oregon requirements for insurers are full disclosure of policy terms including the possibility of future rate increases and a “good faith effort” to make sure that the policy matched a potential customers need. The rules for the most part became effective in March 2005. Certain provisions such as a disclosure of rating practices and annual suitability report will become effective on March 1 and May 1, 2006, respectively. Reporting requirements regarding producers will be due annually starting on June 1, 2006.

Minnesota, one of the states that have enacted the NAIC LTC model with rate stability provisions, also conducted a recent LTC survey after hearing from consumers that policy premiums had increased by as much as 45% in the last year.

The report says interest rate and policy lapse assumptions have dropped dramatically from when companies first made them between 5-10 years ago.

It finds that most LTCI is bought by middle to upper-middle income individuals. The premiums averaged about $1,500 a year in 2003, which the report says “is a large percentage of the Minnesota median household income of $47,000 in 1999.”

Reproduced from National Underwriter Edition, April 15, 2005. Copyright 2005 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.