A common objection to buying and selling long-term care insurance (LTCI) policies concerns rate stability. Fortunately, much of this fear is unfounded and misunderstood. In fact, I believe the rates on LTCI policies sold today will prove to be more stable than they’ve ever been before.

LTCI policies are considered to be guaranteed renewable contracts. This means that the carrier does have the right to request a rate increase on an existing block of policies through the state department of insurance. Any increase granted must apply equally to all policy owners from the requested class of policies and the carrier must keep the policy in force if the premium payments are made. Changes in age or health have no bearing on the contract premiums once issued; the policy may only be cancelled if premiums are not paid.

Nearly all existing LTCI policies — and some developed as late as 2002 — have had one or more rate increases granted. For contracts created after 2002, only a select few policies have requested rate increases. The year 2002 has special meaning.

Under the National Association of Insurance Commissioners (NAIC) model act for LTCI (also referred to as rate stability legislation) initiated in March 2002, rates for LTCI policies were more strictly and uniformly protected.

See also: LTC Rate Model Adopted By NAIC

First, policy rates for all LTCI products had, for the first time, conservative standards for pricing based upon experience gleaned from the previous 25 years of data. Actuarial standards were then required to be met by all carriers going forward.

A second aspect of this sweeping legislative change was that new policies had to meet — for the first time — strict standards to be granted a rate increase. So while it did take several months to be fully adopted by all states (and in some cases policies were still being offered under pre-NAIC model designs until 2004) the “modern” policies offered today have an entirely different standard in pricing to uphold.

See also: LTCI: A Changing Market

Interestingly, rate stability legislation also had a few unintended consequences. Some carriers were uncomfortable about the legislative oversight imposed under the new law and chose instead, to exit the marketplace completely.

One must also remember that the policies sold prior to the enactment of this NAIC model act did not have any legislative oversight or guidelines to be met regarding rate increases. As a result, virtually all of those “old” policies have experienced significant rate changes. Lastly, those companies that no longer sold new policies were under no pressure from their sales department to maintain a positive presence in the marketplace. In short, rate increases became commonplace.

The question then becomes, what about the future risk of rate increases on “modern” LTCI policies, those under the aegis of the model act? Certainly it must be stated unequivocally that rate increases are still possible. However the reasons for rate increases, specifically lower than needed prices on the policy, are greatly diminished by the new pricing standards.

In addition the amounts of future rate increases to be as high as what has been seen recently are far less likely due to restrictions imposed within the law. The universe of carriers that now offer LTCI contracts are now more limited. Those that are currently offering policies have weathered the past and are more committed to the future given the new standards.

One of the paramount reasons carriers have sought rate increases on their “old” policies were assumptions regarding interest rates on their reserves. As we are all well aware, the interest rate environment that began to decline in 2003 has been extremely dismal since 2008. Some may state that the only place interest rates can go in the future is up.

LTCI policies priced in the past few years have been based upon the current interest rates. If interest rates do increase, the internal profit margins on the policies will also rise proportionately, allowing for a reduced need for any rate increase, or a minimal impact at the very least.

Another pricing error of the past was in the assumption that some policies would be purchased but eventually would lapse due to non-payment of the premiums. Other insurance policies such as life insurance contracts have benefited from lapses and have been able to reduce their premiums as a result. Assumptions of 15 percent of policies to lapse over time were very common in the 1980s. However, actual experience showed that far fewer people than expected are dropping their coverage.

For the past several years now actuaries have virtually eliminated lapse supported rate discounts. With policies being sold to younger clients and in many cases through the worksite, it is far more likely that higher than expected lapses will actually begin to occur. This will further reduce the need for a rate increase on a policy priced with a low lapse assumption.

We are also seeing another significant change in LTCI policy rates with the next generation of policies that will change the need for rate increases, the implementation of gender-based rates. As was seen in 2002, with newly reviewed data on experience from the past, this next generation of LTCI products will have rates more appropriate to actual claims experiences.

In point of fact, one major carrier recently implemented a 10 percent rate decrease on an entire block of recently offered policies. One may be able to speculate that this action shows two important facts; rates may have “peaked” to as high as they need to be and it is also a positive signal to all carriers that they may be willing to initiate a rate decrease when actuarially founded, not merely rate increases.

Yes, LTCI policies have seen multiple and significant rate increases. However, the environment has changed dramatically both legislatively and actuarially for the policies we offer today. Simply put, LTCI policies offered today are much safer for the consumer.  In this case, past experience is not an indicator of future performance. 

See also:

Why Asking Your Clients About Long Term Care Matters Now More Than Ever

Long Term Care Planning for Every Client: It Can Happen to Them

  

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