Early long-term care insurance (LTC) policies were vulnerable to underpricing due to data challenges encountered by actuaries. This in turn necessitated future premium increases to cover promised benefits. In response to these issues, the Long-Term Care Insurance Model Act and Regulation was amended in August of 2000 by the National Association of Insurance Commissioners to protect consumers from rate instability. Model guidelines do the following:
- require insurers to disclose any prior rate increases to prospective buyers
- make it more difficult for insurers to obtain rate increases, including imposing fines and penalties, to encourage more conservatism in initial pricing
- require insurers to certify that their premiums will be adequate under moderately adverse circumstances
The last requirement implies that the actuary has to include either implicit or explicit margin in rates so that premiums are sustainable even under the moderately adverse conditions such as higher than expected claim rates or lower than expected lapse rates. The provision proved to be effective in stabilizing premium rates, and it implicitly increased LTC premium rates (and therefore profit margins) at the same time.
Fully insured plans, including voluntary plans provided by employers, are subject to this regulation in the many states that have adopted the model regulation, and many carriers use the same pricing in other states. These plans usually have no provisions for gain sharing resulting from favorable experience. If experience emerges at expected levels (rather than moderately adverse levels), the margin represents an additional cost to the payer and profit to the insurer.
An LTC plan that utilizes self-funding or an alternate funding arrangement can avoid the above described issues. While a schedule of benefits is defined up-front, the employer or the fund manager has the right to revise that schedule, either upwards or downwards. The benefit designs do not need to conform to the standard insured arrangements required by the Model Act, except for the HIPAA rules regarding benefit eligibility. In particular, because of the Employee Retirement Income Security Act, state rules regarding the benefit design, pricing, and payment of premium taxes do not have to be followed.
A self-insured plan can save a significant portion of costs compared to a fully insured plan and, at the same time cover the necessary costs, by being flexible with its contribution schedule—thereby avoiding paying extra for benefits received.
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.