Are rate hikes for long-term care insurance a claim cost time bomb?

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.