States' approach to LTCI policy reinstatements may differ. (AP Photo/Denis Poroy)

As many long-term care (LTC) insurance blocks of business mature, new business management challenges are beginning to appear.

One such emerging risk relates to the reinstatement process, which is the process by which a lapsed policy is reactivated and put back in the same position as it was before the lapse occurred.

A recent increase in reinstatement-related disputes, including litigation, media exposure and department of insurance complaints, indicates the need for insurers to strengthen their risk management controls over this process. 

The National Association of Insurance Commissioners’ Model LTC Regulation provides insureds with robust protection against unintended lapses of their LTC policies in the event of cognitive or functional impairment; nevertheless, disputes relating to the regulatory protected process are on the rise.

For instance, the NAIC Model provides insureds with a five-month period after lapse to request reinstatement, but the model’s language does not specify when the five-month period should begin. The state of Washington suspended one insurer’s license to sell LTC policies for six months in 2011 because it interpreted the five-month time frame as beginning on the date the (unpaid) premium was initially due, not the date on which the lapse transaction occurred, which was 65 days later. 

Similarly, disputes have arisen regarding the regulatory requirement for insureds to prove that cognitive or functional impairment began before the grace period expired. If insureds did not have formal cognitive testing performed and documented in their medical records before the lapse date, or the cognitive testing that was performed does not indicate the presence of a severe cognitive impairment as required for benefit eligibility under the insured’s LTC policy, reinstatement is not required by regulation.

In addition, demands for reinstatement due to alleged errors in the premium billing and collection process (i.e., outside of the regulatory-protected process) are increasing. Examples of such disputes include customers and/or third-party designees claiming not to have received premium notices and/or lapse warnings and insurers claiming premiums arrived after the end of the grace period. This latter issue is problematic for LTC insurers, since LTC policies must include health insurance reinstatement language as well as the aforementioned LTC reinstatement language that protects against an unintentional lapse occurring due to cognitive or functional impairment.

The health insurance reinstatement language states that if a premium is not paid before the grace period ends, the policy will lapse but that later “acceptance” of the premium will reinstate coverage. LTC insurers typically deposit all checks they receive immediately upon receipt and, if they later determine funds have been remitted on a lapsed policy, they refund it by issuing a separate check. This process leaves LTC insurers vulnerable to the argument that they “accepted” the premiums when they deposited them and, thus, coverage was effectively reinstated.    

There are various ways for insurers to mitigate the risks arising from the LTC lapse and reinstatement process. Insurers should consider and implement a variety of operational changes, ranging from simply adding more prominent wording on the outside of envelopes containing lapse warning notices to reduce the likelihood of them being inadvertently discarded as “junk mail”, to complex changes to the premium collection process to ensure checks are from current, not lapsed, customers before being deposited.

As carriers consider these operational changes, it may be valuable to seek advice from internal and external auditors, risk management professionals and/or Sarbanes-Oxley compliance staff in order to gain additional insights and perspectives.

Loretta Jacobs, FSA, MAAA, is a senior manager with Ernst & Young in Chicago, Ill. She can be reached at loretta.jacobs@ey.com.