Can the insurer meet the LTCI pricing target under "moderately adverse" conditions? (AP Photo/Carolyn Kaster)

What should long-term care insurance (LTCI) pricing actuaries do when an LTCI carrier is suffering from terrible investment returns?

That depends, according to the drafters of an LTCI pricing note.

The Long-Term Care Practice note work group, an arm of the American Academy of Actuaries (AAA), Washington, is developing the note – Long-Term Care Compliance with the National Association of Insurance Commissioners Long-Term Care Insurance Model Regulation Relating to Rate Stability – to help actuaries use a long-term care insurance (LTCI) rate stability model regulation that was approved by the National Association of Insurance Commissioners (NAIC), Kansas City, Mo., in 2003.

The model calls for an LTCI carrier to get an actuary to certify that a proposed LTCI price change will be sufficient to cover anticipated costs “under moderately adverse experience,” and that the proposed rates should be high enough to be sustainable over the life of the form, with no future premium increases anticipated.

States can choose whether to implement NAIC models and how to do so.

Interest groups in California, for example, have been asking that state to adopt a modified version of the NAIC model.

The AAA work group note would provide non-binding guidance for actuaries who provide LTCI pricing certification in states with rate stability rules based on the NAIC model, the note drafters say.

The work group recently pushed the comment deadline for the draft back to July 8, from .

The draft note covers topics such as the process for pricing initial LTCI premium rates, the process for preparing rate increases for in-force LTCI policies, and reporting requirements for LTCI rate filings and certifications.

Many LTCI carriers have raised rates since the NAIC developed the model, and some carriers have left the LTCI market.

One challenge facing LTCI carriers has been low interest rates. The Federal Reserve Board has pushed rates down and held them down for years, in an effort to strengthen banks and other large corporate borrowers that can credit with rates close to the rates the U.S. government pays.

Low rates on the kinds of bonds insurers typically invest in and turmoil in the credit markets have hurt carriers’ investment returns in recent years.

Some regulators and consumer groups say insurers should absorb any drops in LTCI profits, or LTCI losses, that result from disappointing investment returns.

Insurers and some regulators say insurers should be able to adjust rates to reflect long-term shifts in the investment climate.

In the draft note, the note work group has included a section with the heading, “What if adverse experience is, at least in part, the result of lower-than-expected investment returns?”

“Regulators in various jurisdictions may have different views of the extent to which laws and regulations allow adverse experience due to shortfalls in investment returns to be used as a justification for filing for rate increases,” the drafters say.

If a company is asking for an increase partly or entirely due to poor investment experience, the actuary might consider recording the extent to which the bad results were result of the company’s investment strategy and the extent which they were due to “broader economic circumstances,” the drafters say.

The actuary also could discuss how long poor investment returns might continue and talk about the kinds of future “moderately adverse investment experience” that could result in the need for another rate increase, the drafters say.