Air shapes birds. Water shapes fish. Experience data studies shape the insurance products you sell.
A new collection of spreadsheets on the Society of Actuaries website may slowly, quietly, help determine what types of stand-alone long-term care insurance and other long-term care (LTC) planning products you can, or can’t, sell, years from now.
That’s the 2000-2011 Long-Term Care Intercompany Experience Study, the SOA’s seventh LTCI experience study. The SOA posted the study on its website this summer.
What’s in there?
Managers of the experience study persuaded 22 insurers to provide detailed information about the LTCI policies they sold or had in force from 2000 through 2011.
The study team created a policy utilization database with information from 18 of the issuers, a claim determination database with information from 13 issuers, and a claim incidence database with information from 12 issuers.
The claim incidence databases covers information on 15 million life years of LTCI exposure and 172,000 claims. The claim terminations database holds information on about 200,000 claims, and the claim utilization database holds information on about $7 billion in claims, or about $35,000 in benefits per claim.
In some cases, the project managers use summary variables, rather than variables that capture the full range of possibilities. The managers included a yes-or-no variable indicating whether a policy had ever been subject to a rate increase, for example, but, because of the difficulty of getting data on the amount of increases from all carriers, they did not include any indication of how big the rate increases were.
Managers of the SOA’s sixth LTCI experience study, which was released in 2011, and covered data from 1984 through 2007, provided many easy-to-use, lay-friendly tables showing, for example, how the insured’s age interacts with an LTCI policy elimination period to influence the likelihood that an insured will file a claim.
Managers of the seventh study took a much different approach: They included no lay-friendly summary tables. All of the information is stored in detailed factor effect tables or publicly available “pivot tables” that actuaries, or other sophisticated users, can slice and decide in many different ways.
Users who are comfortable with pivot tables can compare the experience of men and women in Alaska, or of women in Alaska and women in Wyoming. They can sort the claim utilization database based on variables such as age, claim duration, diagnosis and whether the original site of care was a nursing home, an assisted living facility, a home health care provider or something else.
Marianne Purushotham, an actuary at LIMRA who was on the committee that helped create the 1984-2007 study, said the new study includes information from insurers that covered about 75 percent of people with in force LTCI coverage at the end of the 2000-2011 study period.
“This study does stand out from previous studies of its kind in that we had very strong industry representation,” Purushotham said.
The study team also took the time to develop mathematical models describing the data, and to show where actual results differ the results predicted by the models.
Presenters at an Intercompany Long-Term Care Insurance Conference in March showed, for example, that although actual claims for LTCI policies with lifetime benefits may be higher than those for policies with limited benefits, the claims incidence for policies with limited benefit periods is actually higher than the incidence for policies with lifetime benefits.
Are we there yet?
So, what exactly could the new study do?
Allen Schmitz, an LTCI actuary at Milliman, said insurers are still looking to see how their companies’ experience compares with industry experience, and how well their companies’ experience fits with each model that came out along with the data.
“Individual companies will need to determine the appropriateness of that model, including any anomalies, for their specific situations,” Schmitz said.
Purushotham said she thinks the information gathered for the new study is comparable to the information gathered for past LTCI studies. “It’s unlikely that any material changes in pricing would occur as a result” of the new experience study, she said.
Steve Schoonveld, head of linked benefit product solutions at Lincoln Financial Group, and part of the steering committee that oversaw the latest SOA study project, said the lack of some important variables, such as how a product was sold, and level of underwriting, may limit how much insurers can use the data to design new products and product features.
Other observers suggest that the data in the 2000-2011 study may already be changing the LTC product market.
“There’s no real way for us in the field to know if carriers are using that data or not,” said Leonard Berthelsen, director-health market product division at Financial Brokerage Inc. Omaha, Neb. “I would assume so. They’d be foolish not to use it.”
Berthelsen speculated that John Hancock product designers may have been thinking of the 2000-2011 SOA experience data when they developed their new Performance products, which includes “Flex Credit” mechanism that can give policyholders extra policy value when John Hancock’s investments and LTCI products do well.
The Big Shift
One factor increasing the potential importance of the new study may be a shift in market conditions.
When the SOA organized the first five LTCI experience studies, actuarial work was an important function that typical agents and brokers avoided thinking much about.
The LTCI market was a hot new market.
The end of the “cold war” between the United States and the Soviet Union yielded a peace dividend that helped the economy. Interest rates were high, and predictable enough to give insurers a steady flow of investment income.
LTCI issuers could handle typical product design, sales or pricing problems by using a variety of techniques to dress up their earnings.
By the time project managers published the sixth study, they knew something had gone wrong with LTCI product pricing.
When managers were working on the seventh study, they could see that ISIS had eaten the peace dividend, interest rates were low, and the Sarbanes-Oxley Act of 2002 had outlawed earnings window dressing. The harsh light of the U.S. Generally Accepted Accounting Principles (GAAP) made each ripple in a company’s performance look like a steep slide straight into Hell.
Today, LTCI issuers have to get the math right to have any hope of turning a profit. That shift could ultimately give the new LTCI experience study a little extra influence.
Managing the future
For LTC planners, having a general understanding of what the actuaries are thinking, and what the actuaries’ experience studies show, may be a way to actively managing the future, rather than passively waiting for the future to arrive.
For ideas about concrete ways the 2000-2011 study could affect LTC planners’ lives, read on.
1. Insurers could soon be sending producers studies showing how their LTCI operations are above average.
The pivot tables should give insurers plenty of opportunities to find benchmarks that put them in a good light.
2. LTCI issuers could use the tables to improve their prices.
One of the official goals of the SOA experience study projects is to help insurers make LTCI product pricing more accurate.
3. State insurance regulators could use the experience study data to create or update official valuation tables.
An experience study is simply a collection of information about how various insurance policies performed.
A valuation table is an official document that insurers can use to set minimum reserve levels. Only regulators and legislators can turn experience studies into valuation tables.
Before the new SOA tables could become the basis for a valuation table, someone would have to start a valuation table technical project at the Long-Term Care Actuarial Working Group, an arm of the National Association of Insurance Commissioners (NAIC). The proposal would then have get through the NAIC’s Health Actuarial Task Force, the NAIC’s Health Insurance and Managed Care Committee, and the NAIC’s Executive and Plenary. The Plenary is a body that includes all of the NAIC’s voting members.
4. Lifetime benefits periods could come back.
In recent years, LTCI issuers have cut back on selling LTCI policies with lifetime benefits, mainly because of concerns about the high benefits costs associated with policies with lifetime benefits durations.
Marc Glickman, an LTCI actuary, has argued that the tables support the idea that full medical underwriting can control most of the extra risk associated with offering lifetime policy benefits.
5. Issuers could look at ailing consumers differently.
The ILTCI conference presenters showed a pair of graphics suggesting that LTCI policyholders in the substandard risk category pay more for coverage than policyholders in the standard or premium category, but are less likely to file claims than policyholders in the standard category.
The substandard category is small, and the low claim incidence rate could have to do with sales, marketing or underwriting practices at specific companies, but it could have something to do with the nature of use of long-term care. People who have certain types of health benefits may be more likely to die quickly, possibly without ever using long-term care, than healthier people are.
6. Issuers could find some way to use the new tables to justify policies that use new types of payment schedules, or other new funding arrangements.
Berthelsen has his fingers crossed.
“As carriers develop new linked benefit products, we are seeing some mild concessions on how the product is funded,” he said. “Originally, they only allowed lump-sum premium payment, but now we see the emergence of ongoing premiums as an alternative.”
7. Issuers could use the data to copy the major medical insurers.
Some insurers may be “looking at ways of having the client have more ‘skin in the game’ by offering a high-deductible LTC product,” Berthelsen said.
8. The mere existence of new data could increase some insurers’ interest in LTCI and other LTC-related products.
Most of today’s major LTCI issuers “now have enough claim data to know what they did wrong and, if they are still in the business, to use that to design new products,” Berthelsen said.
Insurers outside the market that would like to swoop in and benefit from the old players’ mistakes have faced a tough obstacle: lack of data.
In the life-LTC and annuity-LTC combination markets, for example, “the addition of another data source may encourage carriers to look at long-term care insurance and potentially further explore combination products,” Schoonveld said.
Berthelsen said he hopes that the study will lead to real improvements in products, but that LTC planners will have to watch out for puffery.
“We as an industry can gather all the data in the world regarding LTC, its claims, effects on consumers and et cetera, but it comes down to the regulators willing to allow change in these products that benefits consumers, while still allowing the providing companies an opportunity to make a profit on the product,” Berthelsen said. “Simply re-creating the same old products and calling them something else does nothing to improve on the value proposition.”
If insurers do use the 2000-2011 study to enter the LTC planning market, and add value, that could be the study’s biggest effect on the market: Giving eager outsiders the information they need to bridge the market’s data moat.