(Graphic: Claude Thau)

Most of us were advised in elementary school to communicate in such a way that we can be understood. It is better to communicate in ways that canNOT be MISunderstood.

Obviously, perfection is unattainable, but reviewing messaging to remove possible confusion usually produces greater comprehension. Authors know what they intend to say, hence are prone to miss potential ambiguity. To ferret out possible confusion, it is essential that a variety of reviewers with different experience “scrub” important communication such as rate increase letters.

(Related: Texas Tells LTCI Issuers to Write Better Rate Hike Letters)

It is also important to provide excellent counseling when difficult decisions (as will be demonstrated below) need to be made.

With the many rate increases in the LTCI industry, you might think that we’ve got the communication down pat, but I saw two letters and a comparison recently that stimulated this article.

“Your premium is not being increased”

The above wording was the beginning of the second sentence of a rate increase letter. The full first two sentences read as follows:

“After a careful review, we have found that a premium increase is necessary to continue providing your long term care coverage. Your premium is not being increased due to changes in your personal health, age or claims history.”

I admit that if clients read both sentences completely, they should understand. But they may be confused and stop reading. There are many simple ways to improve the second sentence. For example:

“Your premium increase is not related to your personal health, age or claims history.”

Or:

“The premium increase is the same for all policies like your policy in your state. It does not vary based on any individual’s personal claims, health status, or age.”

I’m not pushing any particular wording. My point is simply that a rate increase letter should not say, “Your premium is not being increased…”

What happens to the second part of the rate increase?

An 84-year-old client forwarded a letter explaining that her policy was scheduled to have two consecutive 28% rate increases. The letter quoted three alternatives other than accepting the full increase: a landing spot (reducing her future compounding to 2.45%) to maintain her previous premium and options to avoid part of the increase by lengthening her elimination period or shortening her benefit period.

The letter did not indicate what would happen to the second 28% increase if an alternative was selected.

So I emailed the actuary who signed the rate increase filing, guessing that each option replaced both 28% increases. The actuary responded promptly, indicating that he’d research my question.

As I considered my client’s options more fully, I decided that probably each alternative dealt solely with the first 28% increase, resulting in a future 28% increase regardless of which option she selected. I did not want the actuary to think that I was trying to corner him, so I wrote a second message indicating my revised impression.

It turned out that neither of my theories was true!

  • If she lengthened your elimination period or shortened her benefit period, she would subsequently receive a second increase (28% of her then-current premium).
  • If she lowered her future compounding to 2.45%, she would avoid both 28% increases.

How could she make an intelligent choice based on the information in the rate increase letter? With quality review of the letter prior to usage, I would expect someone to have exposed this problem. It would be easy for the letter to state, for each option, what the premium will be after the second stage of the increase.

Are insurers caught between a rock and a hard place?

Generally, actuaries make a certification similar to the following to the insurance department: “If the requested increase is implemented and the underlying assumptions are realized, no further premium rate schedule increases are anticipated. However, going forward, the Company will continue to monitor the experience of this block and reserves the right to take additional rate action if currently unanticipated future deterioration thereof justifies.”

However, if insurers suggest that premiums will remain level in the future, then encounter a situation which spurs an additional premium increase, they fear being subject to lawsuits.

Thus, despite the wording in the actuarial certification, the letter to the policyholder may say something like: “It is likely that your premium will increase again in the future.”

Unfortunately, the more an insurer indicates that future price increases are likely, the more likely that a client will drop coverage or elect a benefit reduction because he/she does not expect to be able to afford future rate increases. Clients fearing (a possibly never-ending) series of rate increases may sacrifice coverage unnecessarily.

The following wording may avoid unduly scaring the client, while not creating exposure to a lawsuit. Again, I’m just showing an alternative, not pushing particular wording.

“If our current assumptions are realized, no further premium increases would be necessary. However, the Company reserves the right to increase prices further if unanticipated deterioration occurs.”

Faulty comparison: Do you prefer a 40% premium increase or a 28.6% reduction in benefits?

Assume that an insurer intends a 40% premium increase, from $3,000 per year to $4,200 per year for a policy with a $5,000 maximum monthly benefit. The client might be told she has a choice between:

  • A 40% premium increase, or
  • A 28.6% reduction in the maximum monthly benefit.

Presented that way, the 28.6% benefit decrease sounds significantly more favorable than a 40% rate increase. Many consumers think that they are saving 40% of the premium by reducing benefits by 28.6%.

A more understandable explanation is that the insurer proposes to charge her $4,200 per year prospectively. She has two choices:

  • She can maintain benefits and accept that increase or
  • She can lower the benefits 28.6% with a corresponding 28.6% ($1,200/$4,200) reduction in the premium.

It makes more sense that the premium and benefits would both be going down the same percentage and a policyholder is less likely to reduce benefits if she realizes that the premium is not dropping by a larger percentage than the benefits.

But recognition that prospective premiums and benefits both reduce by the same percentage STILL does not properly educate the consumer as to the financial trade-off, because it ignores how the present value of future benefits compares to the present value of future premiums.

Why is a 28.6% reduction in benefits frequently less attractive than a 28.6% reduction in prospective premiums?

My 84-year-old client understood the following analysis when I presented it to her by phone, but it would be difficult to convey in a rate increase letter. A simplified version could be included, but a better approach is to provide counseling, as a discussion can clarify misconceptions and provide the optimal explanation for a particular client.

Using proprietary software, I projected the above-mentioned 84-year-old’s probability of needing care that costs $0 to $100,000; v. $100,000 to $250,000; v. $250,000 to $500,000; v. $500,000 to $1 million; v. more than $1 million. In each cell, I projected the average cost.

If she accepted the landing spot, she’d keep her current premium ($2207.80) instead of two 28% increases to $3617.32. In other words, the landing spot would reduce her $3617.32 premium to $2207.80, a 39% reduction, as shown in the light blue highlighted portion of the chart below.

When I looked at how that would impact the likely benefit payments she would receive for various LTC cost ranges, I saw the information shown in this table:

(Graphic: Claude Thau)

The yellow highlighted section shows the client’s probability of incurring LTC costs in the various ranges (None; $0 to $100,000; $100,000 to $250,000; etc.) and the average projected cost in each range, as well as an overall average at the bottom. If she has the financial wherewithal to cover her LTC costs, these costs are independent of her LTCI. (In reality, she might spend less money on LTC if she has less insurance, but I think it was reasonable to presume that she’d spend the same on LTC regardless of her prospective benefits.)

The green highlighted numbers project approximate insurance benefits she would receive if she maintained benefits and paid the higher premium. The orange highlighted numbers project approximate insurance benefits she would receive if she accepted the landing spot to be able to continue her existing premium.

The purple highlighted column shows the reduction in benefits in each LTC cost range.

If she reduced her premium by 39% by moving to 2.45% compounding prospectively, she would lose only 11.2% of likely benefits if she spent less than $100,000 on care, 12.4% if she spent $100,000 to $250,000, 15.2% if she spent $250,000 to $500,000, and 17.3% if she spent more than $500,000, for an average benefit reduction of 15.4%.

A 15.4% benefit reduction (with an 11.2% to 17.3% range) seemed attractive compared to a 39% reduction in premium.

Then I realized that most of her premium payments are behind her, while most of her expected claims lie ahead. That is, over time, the present value of future premiums decreases while the present value of future benefits increases! That’s why insurers have to hold large reserves for these policies. In the claims situations, the present value of premiums is generally lower than the present value of benefits. Saving a larger percentage of the lower present value of premiums may not be attractive compared to giving up a smaller percentage of the higher present value of claims.

To make this intelligible to the client, I calculated how many years of premium savings she would need to enjoy before the premium savings would balance the reduction in benefits. The beige column on the far right below shows that the premium reduction is attractive if she is going to spend less than $100,000. But, across the 61.6% chances of needing LTC, she’d need to enjoy those premium savings for 18 years (to age 102) to justify the average reduction in benefits. My client decided to pay the full increased premium. (The 18-year period would drop to 11.1 years if multiplied by 61.6% to reflect that she has only a 61.6% chance of needing care and would have dropped a bit more had I recognized the time value of money as future premium payments are more front-ended than the claim payments.)

I do not recommend trying to explain the above calculations in a rate increase letter. However, maybe wording similar to the following might make sense:

“We recognize that it is difficult to understand the trade-offs of your various options, so we encourage you to call us or to ask your financial advisor to call us to discuss the alternatives in depth. For example, we could explain why a particular (for example, 20%) reduction in future benefits may have greater impact that the same percentage (20% in this example) reduction in premiums.”

Other observations

I remember a rate increase letter (not recent) that encouraged the client to shift from 5% compounding to 5% simple increases, citing the lower premium that would apply but not pointing out that the current monthly maximum would reduce. Had the letter had adequate review, I’d like to believe that it would have been improved.

Putting on an imaginary regulator hat, I’d like to see the following information in a rate increase filing:

  1. The future dollars of earnings expected on the block of policies with original premiums had original assumptions been accurate.
  2. The future dollars of earnings expected on the block of policies with original premiums and new assumptions. The difference between (1) and (2) is the projected loss due to the change in assumptions.
  3. The future dollars of earnings expected on the block of policies with new premiums and new assumptions. The difference between (3) and (2) is the projected loss expected to be borne by the policyholders.

The above data would allow calculation of how the “pain” will be distributed between the insurer and the policyholders. If I was a regulator, I’d want to know that. As a general agent, I’d like such information because it would help me explain the situation to financial advisors and consumers.

How to do things better

Those of us who earn income for services related to LTCI (whether we are insurance company home office staff, financial advisors or regulators) should remember that our compensation is justified only to the degree that consumers have effective LTCI when they need LTC. To the degree that coverage is prematurely terminated (even just a reduction in coverage), our compensation is not justified.

Rate increases are traumatic for everyone involved and consumers may make unwise decisions, particularly if explanations inadvertently present options in an unbalanced fashion.

Therefore, I believe that the LTCI industry would do well to improve premium rate increase communications and to make better educational resources available to financial advisors and clients when rate increases occur. Hopefully, this article will inspire improvements so that consumers are less likely to misunderstand.

If readers have seen particularly good or weak wording and/or educational services, I’d be interested in those examples.

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Claude Thau (Photo: Claude Thau)

 

Claude Thau is a long-term care insurance consultant. He is also an LTCI wholesaler for Target Insurance Services. He can be reached at CThau@targetins.com and at (913) 404=5824.