Some LTCI Issuers Count More on Future Rate Hikes Than Others: S&P

If state insurance regulators started rejecting too many long-term care insurance (LTCI) rate increase requests, that could cause serious reserving problems for some U.S. LTCI issuers, according to a new report from S&P Global Ratings.

Deep Banerjee and other analysts at S&P Global Ratings have included data on LTCI issuers' rate increase revenue forecasts in a new look at the assumptions the issuers have used to set their reserves.

Eight insurers with large blocks of LTCI policies on their books have assumed, when they set their LTCI reserves, that they will get permission from state insurance regulators to implement future LTCI premium increases with a total value of about $12 billion, according to S&P analyst figures.

The projected premium revenue from the "unapproved rate increases" amounts to about 11% of those eight carriers' $108 billion in LTCI reserves.

The value of the unapproved rate increase revenue used to set reserves ranges from $200 million, at CNA Financial, up to $8 billion at Genworth Financial Inc., according to S&P data.

The ratio of unapproved rate increase revenue included in reserves to current reserves ranges from 1.7%, at CNA, up to about 30%, at Genworth, according to a ThinkAdvisor analysis of the S&P data.

At five carriers, the amount of unapproved rate increase revenue used to set reserves amounts to less than 7% of the total LTCI reserves. At three carriers, the amount of unapproved rate increase revenue used to set reserves amounts to more than 10% of LTCI reserves.

"Currently, regulators are approving most requests for rate increases, if not always the entire amount," the S&P analysts say in their report. "In our base case, we expect insurers to continue to need more premium increases as they offset historical mispricing of these policies. Currently, we also assume regulators will continue to approve most of these rate requests. The lack of regulatory approvals can significantly affect LTC reserve adequacy for most insurers."

Report Details

The S&P analysts included the LTCI rate increase forecast data in a new look at several different types of assumptions issuers have used to set their reserves.

The analysts note that nine issuers sold a total of just 125,000 new LTCI policies in 2017, but that companies have stand-alone LTCI policies covering more than 6.5 million people still in force. Insurers are covering about 4.5 million people through individual policies, and about 2 million through group policies.

In recent years, issuers have announced a wave of large LTCI premium increases, and many have announced big increases in LTCI reserves as a result of "assumption reviews."

In addition to assumptions about future rate increases, the S&P analysts reviewed LTCI issuer assumptions about how the health of the insureds might change; how the life expectancy of the insureds might change; and how likely the policyholders are to let their policies lapse.

The S&P analysts look in their new report at how specific insurers appear to be handling assumptions about likely the insureds are to need long-term care (LTC) services,

The Financial Accounting Standards Board wants to change the rules insurers use to report on the performance of long-duration contracts, and that could lead to big changes in how often LTCI issuers update their reserving assumptions, the analysts say.

"We expect increased volatility in reported reserves as a result of this update," the analysts say..

New FASB rules could also require all LTCI issuers to use a similar, relatively low investment portfolio yield assumption in their reserve calculations, and that shift could make many issuers' reserves look worse, the analysts say.

The analysts predict the difficulties with setting assumptions for stand-alone LTCI coverage could fuel the continued growth of LTC benefits products linked to whole life insurance, universal life insurance and annuities.

The LTC hybrid products "won't be an equivalent substitute to the benefit-rich, original stand-alone LTC insurance products," the analysts write. "But they could offer LTC benefits to policyholders, while also providing a way to better manage the LTC risk for insurers."