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Regulators Look Inside Life-LTC Hybrid Math Guts

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State insurance regulators today are peering inside the actuarial belly of a mysterious class of products: life insurance policies that offer long-term care (LTC) benefits.

One discovery is that some life insurers may not be eager to talk about the inner workings of their life-LTC hybrid secrets.

Another is that the typical issuers that will talk use separate processes to set the reserves for the hybrid life benefits and the LTC benefits.

(Related: Life-LTC Hybrid Sales Level Off: LIMRA)

Warren Jones has included those findings in a slidedeck prepared for the Long-Term Care Actuarial Working Group, an arm of the National Association of Insurance Commissioners (NAIC).

The NAIC is holding a national in-person meeting in New York City this weekend. The working group has been seeking a better understanding of life-LTC hybrids. It included a copy of Jones’ slidedeck in a materials packet for session that was scheduled to take place today.

The NAIC and Life-LTC Hybrids

The NAIC is a group for state insurance regulators.

The Long-Term Care Actuarial Working Group is part of the Health Actuarial Task Force at the NAIC, which, in turn, is part of the NAIC’s Health Insurance and Managed Care Committee.

Insurance agents often think of stand-alone long-term care insurance as a product sold by life insurance agents, but regulators have traditionally classified as the health insurance product.

Perry Kupferman, an actuary with the California Department of Insurance, runs the Long-Term Care Actuarial Working Group.

The Hybrid Issuer Survey

Life-LTC hybrids, or combination products, have become a popular alternative to stand-alone LTCI policies in recent years.

That’s partly because many consumers prefer to buy a product that will provide some value if they don’t need long-term care serves.

Many life insurance company product designers also believe that a life-LTC hybrid is easier to write than stand-alone LTCI, because the main source of uncertain is when the insured will use the policy benefits, not whether the insured will use the policy benefits.

All of the hybrid products have been approved by state insurance regulators, but regulators have had a hard time getting a broad view of how the math inside the hybrid products really works.

The Long-Term Care Combination Product Valuation Work Group, part of the American Academy of Actuaries, teamed up with the academy’s Academy Research Task Force to conduct a survey of the 22 insurers believed to be offering LTC hybrid products in 2015 or 2016, according to Warren Jones’ slidedeck.

Only eight companies responded to the survey, and only six of the companies had life-LTC products in force as of Dec. 31, 2016, according to the slidedeck.

Five of the six companies that completed the survey said they use separate reserving processes to set the reserves for the LTC benefits and the underlying life insurance policies.

The issuers also use separate processes for valuing the benefits themselves.

In response to a question about product design, insurers said the base plan for seven of the products is a universal life policy.

The base plan for one product can be a universal life policy, an indexed universal life policy or a variable universal life policy.

One product can use a term life policy as the base policy, and one can use a whole life policy as the base policy.

Issuers also talk about other hybrid details, such as the interest rate assumptions used to set reserves.

For statutory reserves, for example, insurers said they use 3.5% for six products, and the “statutory reserve interest rate” for three products.

For tax reserves, insurers use an interest rate assumption of 3.5% for five products; the “tax reserve interest rate” for three products; and the “Greater of Prevailing State Assumed Rate and AFR,” or the applicable federal rate, for one product.

The combination product work group has developed a draft practice note, or guide, for actuaries, based in part on the issuer survey findings. Comments on the draft are due Sept. 2.

More Data?

In a memo included in the Long-Term Care Actuarial Working Group materials packet for the NAIC’s meeting, Kevin Fry, an Illinois regulator, talks about the possibility of requiring hybrid issuers to put some hybrid data in their annual financial statements.


Information about the activities of the NAIC’s Long-Term Care Actuarial Working Group are available here.

The draft combination product practice note is available here.

— Read AG 51 Gives State Regulators a Window Into LTCI Issuer Finances, on ThinkAdvisor.

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