Structure and importance of reserve transfer provisions
For employers who offer group LTC benefits to their employees, one of the greatest risks is becoming contractually locked into one insurer. If the insurer decides to exit the market, elects to raise rates, refuses to lower rates, or provides poor service, the employer is then left without the ability to change carriers. To protect themselves, employers should work to include a clear reserve transfer provision within their group long-term care contract, specifying their right to change LTC carriers and how the accumulated reserves will be transferred to the new carrier.
If a contract is not specific about reserve calculation and transfer, disagreements between the incumbent insurance carrier and employers can result in large discrepancies between what the employer believes should be transferred and what the current carrier actually is willing to transfer to the new carrier. Hence, it is important to explicitly describe how reserves will be transferred to the new carrier and the timing for doing so. Most clauses which we have seen are vague, and they do result in disputes. It is best to have an actuary review the clause, and make sure that the back-up assumptions to the calculations are available.
Options for reserve calculation
Two distinct approaches are possibilities for calculation of reserves.
The first option calculates the reserve transfer fund based on experience of the employer since plan implementation. If an insurer has lost money in the past (possibly due to higher claims than expected or lower investment returns than expected) the reserve transfer balance would be lower and thus new insurers would need to offer a higher rate in order to make up for past experience. On the other hand, if experience were favorable, the reserve transfer balance would be larger and new insurers could potentially offer lower rates.
The second option determines actuarial reserves held as if all pricing assumptions made at the time of the policy's issue were accurate. Using this method, the reserve transfer balance is not affected by past experience and new insurers should offer similar rates regardless of what has happened in the past.
Other considerations in reserve transfers
- Are all participants required to change plans?
- For which participants should reserves be transferred? What about those who are on claim, those who have had previous claims, or those who are no longer employed with the company?
- How do new benefit design features and premiums compare with old ones?
- Is there a "market value" adjustment to the reserves?
- What is the timing for the reserve transfer?
- Is the new insurer allowed to underwrite participants?
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.