Structuring a private long-term care insurance rate increase poorly could backfire, a team of actuaries says.
Members of the long-term care reform subcommittee of the American Academy of Actuaries, a Washington, D.C.-based professional association of analysts who collect and interpret risk-related statistics, talk about the risks involved with increasing long-term care insurance premiums, and strategies for managing those risks, in a new commentary.
Issuers have been asking for waves of large long-term care insurance premium increases for years. One reason is changes in state long-term care insurance regulations, and another is the effects of ultra-low interest rates on insurance company investments. Issuers have also been discovering that coverage holders are much more likely to keep policies than they had expected, and, in some cases, more likely to file claims.
But the panel at the American Academy of Actuaries says big rate increases can lead to new problems.
Issuers often give the policyholders affected by big rate changes a choice between paying the higher premiums or paying the same level of premiums for a reduced level of long-term care insurance benefits.
“The policyholders who choose to lapse their policies or reduce their benefits may be the healthier policyholders, leaving the remaining pool of policyholders with higher average expected claims,” the panel says.
Insurers and their regulators should watch carefully to see how a long-term care insurance rate increase affects the health status of the people who keep their coverage, the panel says.
One way to guard against rate-hike-related increases in claim risk may be to let any benefits reduction option offered phase in gradually over time, the panel says.
“When insureds reduce their benefits to help offset a rate increase, an insurer would expect some adverse selection — meaning that the healthier insureds are the ones reducing their benefitsand thus the experience on the block will likely worsen over time,” the panel says. “With the approach described above, there may be less adverse selection involved because the benefit reductions are gradual and may not become significant for many years.”
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