Margins in insurer rates

One of the biggest advantages when moving from fully insured LTC arrangement to a self-funded basis is cost. As rational economic entities, insurers are willing to take on a long-term risk only with adequate protection. Such protection means that insurers must load in conservative margins to ensure that the risks they take are profitable.

Many states have adopted recent NAIC regulations aimed at rate stabilization and require that premium rates hold sufficient margin such that these rates will be adequate even under “moderately adverse” experience. Thus, it is now statutorily required that premiums include margin for the insurer. This has a valuable public policy purpose, which is to stabilize rates so that insureds do not lapse their policies due to premium increases. However, it also increases the margin in an insured premium rate.

In addition to commissions (which may be partially or totally removed for a group product, whether or not it is self-funded), a self-funded plan saves the premium taxes charged by a state (usually in the 2-3% of premium range) and the profit charges that an insurer makes (often in the 5-10% of premium range). These savings occur prior to any inherent conservatism built into the insurer’s rates.

There are a number of pricing assumptions that insurers make in developing long-term care rates. Each of these represents an opportunity to introduce additional costs. Some of these are itemized below:

• Morbidity. LTC rates are typically based upon insured morbidity experience, adjusted by the expected effects of medical underwriting. Without an adjustment for the improvement of health over time (which is supported by historical trends) and, hence, lower nursing home utilization in the future, the rates will contain an implicit morbidity margin.
• Investment earnings rate. Insurers must make assumptions that will protect them over the long term against fluctuations in the level of investment income that one can earn on the funds set aside for future claims. The spread between a reasonable earnings rate and the level at which insurers are willing to take risk produces additional margin in the rates.
• Lapse rates. Lapsers are policyholders who stop paying premium, thereby losing their benefits. In general, higher voluntary lapses cause the needed premium rates to be lower since the premiums of those who lapse support those who do not.
• Statutory Accounting and Risk-Based Capital. A carrier is required to maintain reserves that are more conservative than those generated by “best estimate” assumptions, and it is also required to hold a certain amount of “risk-based capital”. Each of these conservative holdings introduces an additional cost of capital (paying for the use of the money), which adds costs to the carrier’s pricing.

These are all necessary actions for an insurer to take in order to protect itself. A self-insured plan could be expected to save a significant portion of costs compared to a fully insured plan by removing some of this margin. In doing so, it would likely expose itself to additional risk and possibly might need to adjust contributions for an unfavorable fluctuation. On the other hand, a self-insured plan could choose to keep all of these margins in its pricing and then add benefits or reduce contributions if they proved to be unnecessary. In either case, the self-insured plan would cover the necessary costs without paying more than needed.

Note regarding previous publication

The last True Group LTC Advisor discussed the topic of various inflation protection features available to the LTC buyer. One of our readers noted experience of much higher rate of insureds exercising the Guaranteed Purchase Option (GPO) than what was mentioned in our article. The particular carrier experienced GPO uptake rates averaging 44% of the eligible group business and, in general, considers the GPO to be a very well-received alternative to the compound inflation option. Experience varies greatly from carrier to carrier, and it is always informative to learn about the changing dynamic in the group LTC market.

Why is true group long-term care so important?

• Many Americans will have no way to pay for long-term care services when they are needed.
• Insurance for long-term care will not become widespread if only available on an individual basis, which means that the change will need to come first from employers.
• Group coverage needs to include employer contributions to make it affordable to employees and vesting to make it affordable to employers.

National Association of Insurance Commissioners, Long-Term Care Insurance Model Regulation, (2000).