Insurance Commissioner Dave Jones Announces Legislature Passes Major Long-term Care Insurance Reform

[Arthur Rudnick]

previosly posted by scalter

I am not sure of the solution, but I will say this. A lot has to do with everyone trying to make their products sales look good to their investors. Their seems to always have to be a spike in sales and revenue to seem as if business is doing well. At some point it really has to level off.........

If you look at Unum, CNA, Travelers, MetLife, Prudential, Allianz, etc, etc, etc, there does seem to be a point where it has leveled off.

Just like any business, if a company's ROI does not perform up to expectations, they leave the market. Or, in the case of LTCi they raise their rates high enough where they can't sell their product because it's no longer affordable for the consumer that it's targeted for.

I agree, something has to be done, but my solution (earlier post) is the only thing that comes to mind. Let the carriers price their products correctly or suck up the loss on their own. Isn't that the way it works in any other business? Why should an insurance company be any different?

Can you imagine buying a car and in the middle of your loan they come back to you and say: "Hey, we've come to the conclusion that we under-priced your car and we're adding another $2,000 to your loan"?

Please, DO NOT look to the government for answers. Their track record is worse than the insurance companies. When have they ever allocated a sum of money for any project and come in even close to budget?

 

[bluemarlin08]

I don't like the idea of any government agency dictating what a private company can or can't charge. I would like to see companies offer a product that is non cancellable and guaranteed renewable, like some disability policies. The public can then decide if they want to pay the higher price for a policy that the premium is guaranteed versus a policy that is not guaranteed

 

[Norwayguy]

I don't like the idea of any government agency dictating what a private company can or can't charge. I would like to see companies offer a product that is non cancellable and guaranteed renewable, like some disability policies. The public can then decide if they want to pay the higher price for a policy that the premium is guaranteed versus a policy that is not guaranteed

I definatly agree.....I have always been confused about the increases in LTC policies, Yes the cost of providing the care has risen but the company knows on day 1 what their exposure is as the benefit amount is set in stone and I count the inflation protection is also known in advance. If the carrier screws up on utilization numbers they should take it in the shorts.

I would love to see non-can and guaranteed renewable policies offered side by side and allowing the consumer at least the choice of judging if a guaranteed rate for life is worth the effort.

In my 13 years in this business I have seen a huge increase in forms all designed to protect the consumer. In reality the forms protect the carrier and clients eyes glaze over and just sign what's put in front of them. Consumers can be taken advantaged by any crooked person regardless of whatever protections are put in place.

 

[scagnt83]

Im all for greater stability in the LTCI market.
But I dont see this bill as doing much good.

The biggest problem with regulations is not the fact that we have regulations; but that we dont recognize that the existing regulations need modification before layering on anything new.

This is extremely true in the securities world. But its true in insurance as well.

Insurance Commissioner Dave Jones today announced that the California State Legislature has passed AB 999
.....
protects consumers from excessive premium rate volatility by modifying the long-term care insurance (LTC) premium rate development process.

Really too vague to comment on. The premium development process is already a combination of the Insurer & the state DOI. Hopefully they are now using realistic assumptions for lapse ratios, use, & inflation. But using realistic assumptions on these things is in the Insurers best interest...


The measure also allows consumers to make more informed decisions about buying a policy by giving them the chance to review language before purchasing one.

Nothing new.
Most LTCI illustrations/applications are extremely informative about how the contract language reads. And they are not that hard to understand for most people.
Plus they are approved by the DOI and based on guidance by the DOI & NAIC.

Also, a Specimen Contract (which will be close to unreadable for most people) can be obtained from the company if the client wishes.


"The rising cost of long-term care insurance is one of the most pressing issues facing senior consumers today," said Commissioner Jones. "What's most disturbing is the size of long-term care rate increases. They threaten the ability of many seniors, especially those on fixed incomes, to maintain or purchase long-term care insurance.

I agree completely.


AB 999 provides for additional transparency and protections related to long-term care insurance rate increases.

Im not sure how much more transparent it can get.
They list every single LTCI rate increase that insurer has had in the application, and the client has to sign the app certifying that they read it.

It also asks if they can afford a rate increase of 20% in the future...


Long-term care insurance was first sold in California in the early 1980's. Since it was a new product, insurers had no historical experience upon which to rely when setting initial premium rates. As a result, pricing of LTC policies was often based upon what were later found to be inaccurate assumptions. As insurers gained more experience in the market, premium rates increase to compensate for those initial inaccuracies.
Among other things, AB 999 would prevent insurers from passing poor investment returns through to taxpayers and eliminate the practice of insurers "cherry-picking" a small group of policies to justify large rate increases, among other strong consumer protections.

First, they already are not allowed to "cherry pick" a small group of policies to justify a larger rate increase. Rate increases have to be across the board on the same policy line.

Investment returns are tricky. And different from faulty assumptions.

Insurers arent hurting because they lost a bunch of money through investments.
They are hurting because they are required to invest the majority of their holdings in products that are extremely sensitive to interest rates. And interest rates have been historically low now for years. (We all know that the gov has kept rates at a level that brings a new meaning to the term "artificial rates")

On top of that, the Insurers have made assumptions and priced current policy lines based on the Feds statements of increasing rates in the "near future". Which has now been pushed back multiple times by about three years.
The low yields on Treasuries is killing insurers, and its not the insurers fault at all... especially considering its the gov that makes them invest the majority of their holdings in those investments that the gov has kept artificially low rates on... can you say Catch-22??


The faulty assumptions are the insurers fault.

But in all fairness they had no facts to base their assumptions on. And just like many types of insurance, the rates and rate increases are dictated by claims experience and market conditions.

All LTCI is Guaranteed Renewable. Meaning that they have the ability to raise rates.
The reason an insurer doesnt offer a Non-Cancellable policy is because its too risky to them from a claims experience point of view.
And if they did offer a non-can policy, the premium would be so high that they would sell none of it.

So here we have another set of catch-22s
.
- If they offer a non-can policy no-one will be able to afford it because of all the unknowns in the industry. So consumers will just continue to buy GR policies with rate increases.

- If the insurer "eats the losses" of a product that they had no substantial facts about at first, and even warned customers of a possible 20% premium increase in the future; then that company will not be in the LTCI business for long (doesnt matter if its publicly held or mutual, no company is going to continue an unprofitable line of business).
So in short, no more LTCI to protect consumers.

One of the largest problems imo, is that agents do a poor job of informing the client of the possibility of rate increases.
The LTCI app says that if you cant afford a 20% higher premium you should not buy the policy.... how many agents do you really think emphasize that point??!!

If I sell a LTCI policy I tell the client not that there is a "possibility" of a rate increase, but that there "will be" a rate increase at some point.

Im not saying that the Insurers are perfect, they are far from it. But as the point of contact and advisor to the client, agents have done a piss poor job in selling policies and helping clients understand the future of them.



Oh, and the limiting of premium increases to 5 year periods just means that there will be higher increases when it happens instead of gradual increases which most consumers are able to handle better.

Again, I am all for stability in the LTCI market.
But all this bill appears to do is a lot of what is already supposed to be being done. Not only that, but it appears to add even more forms to the paperwork process, which will cause the client to glaze over even more and will be just more forms they blindly sign...

If they want to improve transparency and the sales process then they need to simplify the application and the language it uses. That would be a huge start.

But the problem is any litigation that might come up because of that app/contract. The language is so convoluted because of all the possibilities of lawsuits. And of course all the possibilities of lawsuits are a result of the courts allowing almost any lawsuit to be heard.... just another insurance catch-22...

 

[csalter]

An increase is an increase plain and simple. I don't care if I know about it in advance or not. If I am on a fixed income it does not matter to me if it's in 5% incremens or 30% lumps sums, I still only have a certain amount of income to survive and it's fixed.

 

[ned55]

As a California resident, I am proud of the state's pending legislation for LTC (additional) rate stabilization. Insurance companies must understand the risk involved when offering a product. If they cannot adequately determine the risk (regulatory, interest rate, market risk included), they should not be selling Long Term Care Insurance. As a consumer, rate stability is important. When doing analysis of the odds of my needing insurance, and comparing insurance cost, and potential investment returns on self insurance, I take that risk too when buying a policy. When the price changes, so does the advantage of insurance. Like any investment bet, LTC Insurance is only a good investment at the right price. I read the disclosures that prices may be increased, however I also know about the previous rate stabilization laws to protect consumers like me. The rates should only increase if an insurance company is near bankruptcy or in receivership.

 

[Norwayguy]

An increase is an increase plan and simple. I don't care if I know about it in advance or not. If I am on a fixed income it does not matter to me if it's in 5% incremens or 30% lumps sums, I still only have a certain amount of income to survive and it's fixed.

I'm with you and I don't agree with the argument of its a form of health insurance and the costs of LTC go up because the carrier has limited its risk on the front end with the benefit design, the only true unknown is utilization. I would love to see non-cancellable policies like DI and the option of taking on the risk of just a guaranteed renewable policy.

 

[scagnt83]

An increase is an increase plain and simple. I don't care if I know about it in advance or not. If I am on a fixed income it does not matter to me if it's in 5% incremens or 30% lumps sums, I still only have a certain amount of income to survive and it's fixed.

Im not trying to downplay the significance of rate increases to retirees on a fixed budget. A huge increase to an already large premium is not an easy pill to swallow; and is a huge risk to retirees who do not plan for it.

But now given the ability of hindsight, as a buyer or seller of LTCI you should not budget for the initial premium, but budget for 10%-20% above. Thats just the reality of the situation. And no legislation in the free world will fix that.
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I'm with you and I don't agree with the argument of its a form of health insurance and the costs of LTC go up because the carrier has limited its risk on the front end with the benefit design, the only true unknown is utilization. I would love to see non-cancellable policies like DI and the option of taking on the risk of just a guaranteed renewable policy.

Why risk non-can when limited pay (which was not non-can during the pay period) barely got off the ground? Look at the premium difference between GR & NC in the DI world.
How does that make sense from a risk/financial perspective?



Utilization is not the only risk. They also have the risk of interest yield.

I dont think that most agents truly think about this fact.

Example:
10 Year Note

Oct 08'- 4%
Dec08'- 2%

Thats a 50% drop

Feb 11'- 3.7%
Sept 12'- 1.6%

Over a 50% drop


Now think about this.

10 year historical average- 3.77%
1 year historical average- 1.96%

Almost half.

Historically since inception the average is 6.2%
Again, currently its basically 1/4 of the historical average (1.6%).



If you havent grasped my point yet, this is a huge hit to insurers who based returns (aka: return on premium/General Account (assets)) on double or triple what they are currently receiving.

And since each line of business has separate reserve requirements, which are often based on historical averages and/or current rates/averages of treasuries. And the premiums for each separate block of business are based on the rates for that point in time.
And if rates are cut by 50% of what is expected/experienced/& especially foretold; then it causes problems.


And to wrap this up, lets not forget that these rates are set by our gov. And they are artificially low so that the banks can buy money from the gov for next to nothing and turn around and not loan it to the middle class/working class, only to big business, and use it to cushion reserves and pay debts from their subprime debacle that the gov got them wrapped up in! ... just another big government catch-22

 

[csalter]

Im not trying to downplay the significance of rate increases to retirees on a fixed budget. A huge increase to an already large premium is not an easy pill to swallow; and is a huge risk to retirees who do not plan for it.

But now given the ability of hindsight, as a buyer or seller of LTCI you should not budget for the initial premium, but budget for 10%-20% above. Thats just the reality of the situation. And no legislation in the free world will fix that.
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Now I am just Joe Average and don't know much about insurance or its business. However, as a consumer who just bought a policy a little over a year ago, I have become interested in long term care. I swayed back and forth about going 10 pay or not. I eventually went with 10 pay because I did not want any payments when I retired, but more importantly, I was concerned about the rising rates of LTCi. I looked at the increases that various insurance companies were asking for and granted in different states and was amazed at what they were granted. A 10% or 20% increase would have been a huge break. We probably would not even have this discussion if all we were talking about was a 10% - 20% increase over the term of the policy. However, there were requests for 30%, 40% and 45% from various insurers and in some cases it was not the first time the consumers were hit with a rate increase. People are not preparing for that kind of increase and are at the mercy of the insurer after they have paid faithfully for years to them to reduce their benefits or be priced out all together. I don't care if you have hindsight, foresight or are just plain blind, a senior on a fix income is in trouble when these rates are increasing at those rates.

 

[scagnt83]

Now I am just Joe Average and don't know much about insurance or its business. However, as a consumer who just bought a policy a little over a year ago, I have become interested in long term care. I swayed back and forth about going 10 pay or not. I eventually went with 10 pay because I did not want any payments when I retired, but more importantly, I was concerned about the rising rates of LTCi. I looked at the increases that various insurance companies were asking for and granted in different states and was amazed at what they were granted. A 10% or 20% increase would have been a huge break. We probably would not even have this discussion if all we were talking about was a 10% - 20% increase over the term of the policy. However, there were requests for 30%, 40% and 45% from various insurers and in some cases it was not the first time the consumers were hit with a rate increase. People are not preparing for that kind of increase and are at the mercy of the insurer after they have paid faithfully for years to them to reduce their benefits or be priced out all together. I don't care if you have hindsight, foresight or are just plain blind, a senior on a fix income is in trouble when these rates are increasing at those rates.

Dont apologize for not being an agent. A consumers perspective on this forum is invaluable.

Your right. A 30%-45% increase is huge. And certainly scares people about the future of their coverage.

But in all fairness we need to put those increases into perspective. Again, Im not trying to downplay the effect they have on the people they happen to. But "rate increases of 40%" is not the norm at all.


For Individual policies, the average rate increase has been 10%-20%. And usually that has been around policy year 6-10+.

The amount of LTCI policy holders that have received increases over 20% (the 40% increases the news talks about), represent maybe around 10% of all LTCI policy holders in the US (probably less than that)

Also, those policies have been group policies.
Now, I realize that it doesnt matter to the individual who is paying more if their policy is a group policy or not.
But again, we are talking about the big picture here.

Group policies had simplified underwriting (lax medical requirements), along with discounted premiums.
This means that when those policies were increased by 30%-40%, they were still priced lower than what a comparable individual policy would cost.
It doesnt make the extra premium any cheaper, but it does mean that there are people in their age group that would kill for that premium w/ those benefits, even after a 30% increase.
Also, individual policies have much stricter health requirements. So the adverse health conditions you see on group policies (which affect the use of group policies adversely) is not as present in Individual lines of LTCI.

So in short, judging from history, the average Individual LTCI client (probably 90% of the total LTCI market (others here might know that figure for sure)) can expect around a 20% increase by year 10-15. And certainly should budget for it.



Back to your decision of a 10pay.
I like limited pay options if it fits into the budget. I like 20pay options over 10pay though.
But depending on you situation, the premium can be a huge lost opportunity cost.
And the limited pay options are seldom the best way to go for most people imo.


For a 55yo.
The difference between the lowest price lifetime vs. the 10 pay is $8,600/year.
($3200 vs. $11,800).

Lets assume the client lives to 85 (30 years).
And the lifetime pay increases 30% after 10 years ($4,160/y).

So thats $115k over 30 years. Vs. $118k over 10 years (assuming the 10 pay doesnt increase premiums).

If we extend it out to 40 years on the lifetime pay; that puts us at $156k over 40 years.
And remember this is with a 30% increase, something almost none (or very few) individual ltci policy holders have experienced.



But as a retirement planner, here is the problem I have with the 10 pay. The lost opportunity cost of the $8600 per year.
In other words, what that $8600 could be doing for you over the 10 years.

That extra $8600 for the 10pay could create a $107K bucket of money after 10 years
(at 4% interest (which is the highest fixed rate available at the moment))

So 10 years out with the life-pay, you have a $3200/y premium & $100k in extra funds.

Assuming that the life-pay increases by 30% in year 11 ($4k/y total); the $100k side fund can use the 4% interest ($4k/y) to pay the premium of the life-pay.

With this method you retain $100k in liquidity/emergency funds.
Think about if you need the coverage and go into a home. Your premiums stop and you are left with $100k to use as you need.


I have just found that when doing retirement planning with clients, even though the 10pay seems stable and appealing, people find that the extra $100k is often worth the life-pay option.

There is just a whole lot of lost opportunity cost with the 10pay.

Personally, I would rather have $100k in cash sitting in the bank knowing that I can fund the LTCI for life with it, and have the lump sum for emergencies.
With the 10pay option, your basically giving your extra $100k to the Insurance Company.

But like I always say, any type of LTCI coverage is better than none at all.
If you end up needing the coverage, how much you paid or what you lost in "opportunity cost" will not matter to you.



And your overall point (that LTCI premiums/increases are a huge budgeting concern for retirees) is spot on. It is increasingly a huge danger for those who do not plan for the increases.

But that goes back to my point about agents not selling it correctly. They need to sell the client a premium that the client can afford a 20% increase on... and forewarn the client of the probability of an increase.
LTCI rate increases are not going anywhere soon. Us agents need to sell policies with that fact in mind. If not, the LTCI industry will be in even more of a mess.