Regulators Eye Rules for 600% Long-Term Care Insurance Rate Increases

State insurance regulators are trying to develop multi-state rules for responding to long-term care insurance pricing meltdowns.

The Long-Term Care Actuarial Working Group, an arm of the National Association of Insurance Commissioners, is trying to come up with one approach that one team could use to review long-term care insurance rate increase requests for many different states.

One question is how a multi-state review team should proceed if an insurer will end up charging rates today that are many times higher than the original rates.

The regulators are looking at proposals that show what would happen if the new rate increase requested by an insurer and the insurer’s previous rate increases add up to 400%, 600% or even 1,000%.

A 400% cumulative increase means that the current premiums will be five times higher than the original premiums.

A 1,000% cumulative increase means that the current premiums will be 11 times higher than the original premiums.

The history: U.S. insurers predicted correctly in the 1970s that the baby boomers would eventually need help paying for long-term care.

The insurers got almost everything else wrong when they priced the long-term care insurance policies sold in the 1970s through the early 2000s, ranging from how likely the policyholders were to keep their policies, to how often insureds would file claims, to how much the investment portfolios that support the benefit obligations would earn.

LTCI issuers once said they would work to hold premiums steady, but critics argued that the issuers were underpricing their coverage.

State regulators imposed rate stabilization rules around 2000 that were supposed to reduce the need for rate increases.

Since then, insurers have responded to discoveries about incorrect pricing assumptions and inadequate prices by asking regulators for wave after wave of rate increases.

The NAIC is trying to set up one central body that would speed up and standardize the LTCI rate increase process, by having one multi-state panel handle rate change requests for all of the states that would be willing to use the multi-state review process.

The actuarial working group trying to develop a standard rate review strategy has focused on a strategy used by Minnesota, with a specific formula, and a strategy proposed by Missouri that effectively caps cumulative rate increases at 600%.

Industry views: Representatives from the American Council of Life Insurers and America’s Health Insurance Plans have argued that the rules should help insurers charge enough to keep blocks of long-term care insurance policies solvent.

Regulators should avoid rules that impose rigid rate increase caps, favor one group of policyholders over another or seek to punish the issuers, the groups say.

“The inclusion of non-actuarial factors in the rate review process opens the door for allowing political or social considerations to override actuarial principles and sets a dangerous precedent that could lead to unintended consequences,” the groups say. “Insurers have a fundamental responsibility to ensure the financial sustainability of their products, and actuarially sound rates are critical to this goal.”

The view from Texas: Texas regulators have suggested in a comment that the Minnesota method, which has been the method getting the most attention from the working group, could justify excessive rate increases.

“Texas strives to strike a balance between rates that support company solvency and that are fair to consumers,” officials say in the Texas comment.

“Texas seldom approves a rate increase that exceeds 100% and would welcome a cumulative cap of 600%,” officials add.

Texas is supporting the idea of a 600% cap or extra restrictions when cumulative increases exceed 400%.

One concern about very large increases on older, shrinking blocks of LTCI policies is that even big increases don’t do much to reduce the lifetime loss ratio, officials say.

“We increasingly see a company strategy to implement extremely large increases, hopeful that policyholders will either significantly reduce benefits or lapse coverage,” Texas officials say.

Policyholders who let coverage lapse may end up with a relatively small amount of “nonforfeiture value” required by state insurance laws and regulations.

“We question whether such a strategy is fair to the average consumer in these blocks — typically aged in the 80s or even 90s — who often have limited to no alternative market options,” Texas officials say.

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