Group LTC programs should include reserve transfer provisions

Why is a reserve transfer provision so critical?

For an employer, perhaps the most significant risk associated with a fully insured long-term care plan is the risk of getting locked into one insurance carrier. Suppose an insurer chooses to raise rates, refuses to lower rates, or provides poor service. Alternatively, the employer may merge with another employer that uses another carrier. What rights does an employer have to move the contract to another insurer? While most contracts allow an employer to move from one carrier to another, the amount of reserves to be moved can become a critical issue since these reserves can grow exceptionally large. Surprisingly, most contracts do not have explicit reserve transfer provisions indicating how to calculate such reserve transfers although this protection is vital for employers.

What is a reserve transfer provision?

A reserve transfer provision within a group long-term care contract explicitly indicates if and how the accumulated reserves will be transferred from one carrier to another should the employer choose to change carriers. Since long-term care coverage is primarily a pre-funding vehicle for future contingencies, an insurer builds up substantial reserves. If an employer wishes to change carriers, these reserves could potentially be lost requiring employees to start over with the funding of their reserve accounts. Since the reserve build-up will last over 50 years, one of the events that might trigger a needed transfer is very likely to happen.

How are reserves estimated?

There are divergent philosophies on how the reserves should be calculated. Some insurers would like a “transfer” to mean that they keep the existing participants while a new carrier takes only new employees. From the employer’s perspective, this is usually the least flexible and least useful approach.

Among good-faith transfer provisions, there are two distinct approaches. One is focused on the actuarial reserves held if all pricing assumptions were accurate. Using this method of determining the reserve amount, an employer does not benefit or suffer from deviations from those assumptions that occur when their group has good or bad claims experience. The other approach calculates the reserves to be transferred as a fund balance that fully reflects the employer’s experience. Each has very different implications for the long-term management of the program, which should be considered.

There are additional considerations for employers regarding these reserves:

• For which participants should reserves be transferred? What about those on claim, those previously on claim, individuals who have departed employment, or those with paid-up or non-forfeiture benefits?
• Must participants move to the new plan?
• How are the new benefit design features and premiums set?
• Is the new insurer allowed to underwrite the participants?
• Is there a “market value adjustment” to the reserves, and how is it calculated?

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.