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Long Term Care Insurance

Political Action affects CT LTCI rate approval

The Event

On Feb 19, 2021, the Conn. Dept. of Insurance approved a 25% rate increase for a subset of (3) Brighthouse policy forms (PF). The approval was half of the 50% requested. On the surface, this appears routine – a carrier asks more, gets less. We have covered Brighthouse (BHF) extensively since it is emblematic of legacy LTCI Industry core issues. It is our Whipping Boy because it is so far off-the-range and makes a terrific case study for what is wrong with legacy LTCI.

The problem

In Dec. 2019, the carrier actuaries made the case that all its 13 books were really the same thus justified a pooled filing. In the filing, all books were subject to a startling +173% rate increase. Do the math. The actuaries are suggesting in the aggregate 13 PFs were priced at 37% of their fair value.

CT DOI rejected that filing since LTC4 had a few months earlier received a rate increase. Later, the pooled-filing was subsequently forked into two separate pooled filings, LTC4 (3 PFs) and pre-LTC4 (10 PFs).

The filing just now adjudicated was for LTC4. Two months ago, pre-LTC4 received a 50% increase based on an asked for +173%. The actuaries must have thought that in asking for a 50%, this submission would be a layup.

On a segregated basis, our metrics show LTC4 is clearly a worse performer in terms of loss ratio than pre-LTC4. LTC4 increases should be larger than pre-LTC4. The more than 4,000 pre-LTC4 policyholders have been had. Oh well, what’s new!?

We believe the ruling was politically motivated, not actuarially justified, a term automatically thrown out against any consumer objections.  This is potential welcoming news for all LTCI consumers. This case may have set a precedent to doom the phrase actuarial justification as a regulatory argument.

The Political Action relates to an organized effort by an angry CT consumer mob. One can read about this in the rate filing final disposition. But there is more to the story. Later.

Categories
Long Term Care Insurance

How much are you being ripped off?

By how much?

The Book of Business is the primary determinant of your current and potential loss. We use data found in rate filings to calculate average and aggregate loss per policyholder.

The term Economic Harm Modeling (EHM) was first introduced in the Skochin v. Genworth settlement discussion. EHM identifies policyholder loss exposure as result of the industry’s pricing practices.

EHM has 3 distinct components:

  1. Present Value (PV) past overcharges due to premiums that exceed a fair premium (SDN);
  2. PV loss due to future premiums that exceed SDN;
  3. Average PV loss due to forced lapsing; In a rate filing, carriers frequently express what percent of policyholders are expected to abandon their policies.  Lack of trust of the so-called insurance relationship is a leading cause of lapsing.

A fair premium (SDN) acknowledges carriers’ contractual right to reprice LTCI premiums given claims history and projection. However, SDN does not acknowledge the industry has the right to chargeback existing policyholders for past underpricing. In 2018, a group of actuaries seem to have admitted what was going on, a little late in the day.

For component #2, it is important to differentiate which premium is being compared to the SDN. Is it the current premium that a regulator has already granted? Or, is it the premium we expect will ultimately be granted because the Book is still underpriced by industry methods? For the latter, we use a Shock Lapse Premium (SLAP).  SLAP is an instant repricing of the Book to meet its minimum statutory lifetime loss ratio (60% in CT).

Case of Economic Harm Modeling

This is a case of nearly 4,000 policyholders in CT. The Book’s SDN is 2.94x original premium in the aggregate. We estimate an average loss of $13.0K due to loss components #2 above as premiums will be stepped up (4.13x original) starting in 2021. This will result in a 29% chargeback. The carrier has indicated a forced lapse rate of 2.3%. Given the average contract value of $60,572, component #3 loss is $1,393 for a total average expected loss of $14.4K. Across the state, the net economic loss to seniors is approximately $56 million. If the Book were repriced to its SLAP of 15.75x original, the loss would grow to $101K per policyholder. The future does not look particularly bright for policyholders in this book.

This Book does not yet have a component #1 loss. Others do. We believe that component #1 loss will increase rather dramatically for all legacy LTCI products.

Other stakeholders

Here is a list of all states offering tax incentives for LTCI. If a premium contains pricing elements that are not in fact fair premium, a portion of the tax credits or deductions given are for a different purpose than what might have been intended. Who gains and who loses? More work on this question is needed.

We hope to report on other cases as our research evolves.

 

Categories
Long Term Care Insurance

8-K LTCI Filing Gambit

LTCI SEC filings

What is the process when an LTCI carrier is found to be under-reserved? The 8-K filing offers teaching points of the LTCI Gambit. Here is a recent one from UNUM.

“On May 4, 2020, the Company announced that in connection with a financial  examination of its Maine domiciled Unum Life Insurance Company of America (“Unum America”) subsidiary, which is expected to close at the end of the second quarter, the Maine Bureau of Insurance (the “MBOI”) has concluded that Unum America’s long-term care statutory reserves are deficient by $2.1 billion as of December 31, 2018. As permitted by the MBOI, Unum America will phase in the additional statutory reserves over seven years beginning with year-end 2020 and ending with year-end 2026. The 2020 phase-in amount is estimated to be between $200 million and $250 million. This strengthening will be accomplished by the company’s actuaries incorporating explicitly agreed upon margins into its existing assumptions for annual statutory reserve adequacy testing. These actions will add margin to Unum America’s best estimate assumptions. The Company plans to fund the additional statutory reserves with expected cash flows. The Company’s long-term care reserves and financial results reported under generally accepted accounting principles are not affected by the MBOI’s examination conclusion.

The Company has suspended its current share repurchase authorization and will not repurchase shares in 2020. Additionally, the Company intends to continue to pay its common stock dividend at the current rate.

How much was the share repurchase program costing over the past 3 years? This answer can be found in a recent 10-K Cash Flow from Operating Activities – about $1.2 billion. Add dividends for $0.6 billion bringing the total up to $1.8 billion over 3 years.

Proposed Carrier Best Practices

What do we propose as the best practice for carriers?

  • First, get into an under-reserved state ($2.1 billion will do just fine) by instituting a share buyback program to boost share prices; offer rich dividends too;
  • Be found to be in an under-reserved status by regulators;
  • Admit to the under-reserved state and embark on a multi-year plan to close the reserve gap;
  • Keep chaos at a minimum by 1 change at a time – i.e. maintain the dividend;
  • Institute a cash flow program to pay into reserves, by charging your policyholders; have the regulators enthusiastically support the cash flow program by passing rate increases & crying the insolvency wolf;
  • When the all-clear signal is given, resume the share buyback program;
  • Hope nobody notices.

That’s a plan!

Group CT Partnership +299% filing

Here’s a good start seen in the filing MEAM-131987416 (Policy Form GMB96/CT, inception year 1997) affecting 1,268 CT state workers. Med America, the reinsurer states, “although a substantially larger increase would be needed to return this policy form to its expected loss ratio, the company is limiting its premium rate increase to 299%” (to a lifetime loss ratio of 94%). Since this is the first rate increase ever, the CT DOI grants +50% this time out. By: (1.) the reinsurer not asking for the full increase (which would have brought premiums to 4x original), and (2.) by CT DOI being stingy, the Catch Up damage is significantly worse for policyholders. We show, by our methods, that policyholders of GMB96/CT could in theory be charged 9x original premium. This assumes carriers are permitted to chargeback existing policyholders for underpricing the past 23 years. On the other hand, we believe fair premium is 2.16x without chargebacks.

Is there a problem? Hard to say. It all seems in keeping with the plan to enable UNM to resume their stock repurchases.

Update June 29, 2020

To the CT DOI in May, I inquired whether the DOI reviews the type of UNUM practice in adjudicating rate filings. Asked, not answered (“what happened to UNUM’s response”?), the short of it is “no”. Previously, the CT DOI in public forum has asserted policyholders have an obligation to pay higher (exorbitant) rates to ensure LTCI carrier(s) do not go insolvent. In CT, LTCI carriers can count on the regulator’s support for future rate increases if their reserves are depleted due to share buybacks or excess payment of dividends. So why not? This practice appears to have been green-lighted.

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Long Term Care Insurance

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Long Term Care Insurance

Discriminatory Integrated Filings

Recently, I have been asked about the fairness of integrated filings. Transamerica, an LTCI carrier with 50 books, has used an integrated filing (IF) approach since 2009.

What is an integrated filing (IF)?

Nearly all LTCI carriers have more than 1 Book of business. An IF combines several books into one logical filing. By that, we mean the Master Exhibit values represent the sum of premiums & claims across all books. The lifetime loss ratio that drives rate adjudication is calculated accordingly. To be sure, other filings combine books under one cover (SERFF-ID) but the books are logically separate.

Transamerica and Brighthouse are known to use IF. Other carriers may use IF in the future.

Administrative efficiency and lower cost is one reason to use IF. The question I was asked is whether it is discriminatory. Most people would intuitively answer this question “Yes”! Is there a data science technique to answer this question?

First, if every filing for a rate increase has been integrated for over a decade as in Transamerica’s case, the task would be to somehow disassemble the filing into its 50 component books. This is a monumental, mind boggling task. The carriers hold the cards by not releasing details.

Brighthouse in the past two years evolved to an IF from 13 book filings. Key conclusions from a research experiment looking at this case reveal:

    • Books that have a low ratio of current rate : SDN (fair rate) just prior to integration are treated very favorably, having escaped a high potential premium had they stayed on their own. These tend to be underperforming books that we sometimes refer to a trash.
    • By contrast, books that have a high ratio just prior to integration are treated very unfavorably. Why is this? They are subsidizing the trash to the degree of a trash’s weight.

An integrated filing is a zero sum game for consumers. Unless all (13 or 50) books perform the same, you have winners & losers. If you are a winner, do not rock the boat. If you are a big loser, consider rocking the boat.

Integrated filings are discriminatory

How you do know if you are a loser or winner? Without any data we have a rule-of-thumb: If you had reason to believe you were winning before, you probably just lost. Vice versa. Rule-of-thumbs lack certainty. If certainty is necessary, the required data together with a computational task is required to derive SDN to be conclusive on discrimination and financial loss. We do that for stakeholders when there is an incentive.

Here is where it can get nasty

What about the questioner who wants clarity. Have they been on the losing end subsidizing the trash? What is the loss in hard dollar terms? I say to them, you need to acquire the most recent filing of all 50 books. One could do the same experiment as was done for Brighthouse.

Just ask for the 50 filings. Say you have a right to know. You know that I am kidding, right!?

Another approach is to ask the carrier (or DOI) to disassemble your policy history to determine you have been treated fairly. What is their criteria that your book has not been unfairly treated? Shouldn’t this be stated in the filing already?

Simplest approach: If the carrier (or DOI) is unable or unwilling to track it through, then you may have a claim that your Original Policy Assumption (Methodological Quirk) stands. What would that mean exactly? OPA’s were designed to meet minimum statutory loss ratio. You are back to square 1.0 x your original premium. Forever.

Wouldn’t mind hearing an intelligent rebuttal or two as this is untested.

Final thought: Brighthouse is not the subject of this post. It is the perfect case to respond to a policyholder’s inquiry.

Categories
Long Term Care Insurance

Another LTCI Methodological Quirk

This post describes another example of:

https://www.financialmedic.com/blog/risk-based-horizon-scanning/

We use a 1 page Master Exhibit 2017 SERFF-ID MULF-130960272, a 666 page filing covering several books.

The exhibit contains three 3-column sets:

      • Original Pricing Assumptions (OPA) in the 1st 3-column set;
      • The experience / projection before EP(b)(b) the requested rate increase as the 2nd column set; and
      • The experience / projection after EP(a) the requested rate increase as the 3rd column set.

Each 3-column set includes incurred claims, premiums, and loss ratio (claims / premiums) for each year of the 52 year life (1998-2040). The summary includes the lifetime loss ratio (LLR).

OPA is the initial justification for pricing a policy in the beginning of a book’s life. Consider OPA random fiction.

Note the yearly loss ratio (LR) comparisons of OPA vs. either of the two last 3-column sets (EPs). OPA’s LR is always greater except for 2007 – 2008.  Despite this, OPA’s LLR (0.67) is lower than EF(b) (0.92) and EF(a) (0.87). This seems quirky. It would be natural to ask of this riddle…

How Could This Be?

Observe EP premiums & claims are well above OPA starting around 2000. Could the carrier have added books along the way, but continue to use the same OPA? It appears so!

Answer to the riddle: Since EP premiums & claims >> OPA in the weighty years when annual loss ratios exceeds 90% (e.g. years 2005 & beyond), these later years dominate the LLR calculation.

Shouldn’t the industry (carrier, regulators) have known by 2007 that OPA was far off given the wide premium & claim variance between OPA and EP?

What difference does this make?

Refer to the table below. This is the framework used by some regulators to judge how much of an increase is warranted, if any. A comparison is made between actual v. expected loss ratios, the latter from the dated and obsolete OPA!

Year Earned Premium (billions) Incurred Claims (billions) (1) Actual (LLR) (2) Expect (LLR) (1)/(2)
1991-2013 $1.572 $1.259 80.16% 66.53% 1.20
2014 $0.055 $0.109 198.80% 266.66% 0.75
2015 $0.055 $0.116 211.47% 298.71% 0.71
Total $1.682 $1.486 88.33% 71.31% 1.24

Using the invalid expected LR(2) for the stated periods (1991-2013, 2014, 2015) meant the carrier’s rate requests had to meet a secondary test in addition to the primary minimum statutory (MLLF of 0.60), thus causing a delay in rate increases. Such delays exascerbate the well-known Catch Up problem where future increases must make up for lost time. Policyholders presently own this liability though we make the case that they should not.

My guess is that the LTCI industry is not even aware of this problem or its consequences.

Other cases (e.g. AEGB-131679838) use an OPA that has the opposite problem. Here, we see OPA LR(s) consistently under EP LRs and OPA. This means the secondary test would not block rate request increases that would be otherwise blocked.

Rate grants to your policy are sensitive to whatever fictional OPA created over two decades ago.

Final Note (MULF-130960272): We used our app to review OPA and EP key metrics. The Step Down (SDN) for the OPA is 1.16>1.0 since the OPA had an LLR of 0.67 as opposed to the 0.6 MLLR. By contrast, the EP filings have an SDN of 1.73 reflecting a rise in the claims-to-premium ratio compared to OP. The Step Up (SUP) are 12.5 and 14.5, respectively for OPA v. EP. In either case, both books are Catch Up sensitive. Rate increases will continue as they have since the first in 2009, now a total of five. The EP increases were not granted in a timely fashion, due both to a dozing industry and secondary test described above. The current premium  is 2.36x the base aggregate premium (1.0), +26% above the EP SDN (1.73). Policyholders are currently paying a 26% subsidy of their current annual premium to pay for past losses.

 

Categories
Long Term Care Insurance

Risk Based Horizon Scanning

In the best case, the LTCI regulatory apparatus has proven itself inadequate concerning principles of risk-based long-term horizon scanning. A worse case would be if the carriers’ scheme was intentional and sufficiently subtle to dupe the regulatory agencies. The worst case is that neither carrier or regulatory apparatus is aware of long-term horizon scanning.

Risk-based horizon scanning

It is a formal effort and ability to identify risks or  assumptions that could go wrong to the best plan. Often, you hear the industry’s standard lament (excuse) for rate increases: (1) interest rates too low, (2) claims projections were understated, and (3) inadequate lapse rates. May I ask whether there were any sensitivity analyses performed as is customary for any mathematical modeling endeavor? Stress tests? Apparently not. This goes in the book as a major product design defect for failing to meet standards of basic commercial modeling.

Our recent efforts in Time Series Analysis (TSA), a forensic tool, have been revealing.  Our first post on TSA was LTCI Time Bandit which explains some key metrics (SUP, SDN, CEP) used below. The case below makes a point about long-term horizon scanning.

The experiment below concerns the rate filing history of carrier AEG though it can be any carrier (book). Since 2012, numerous AEG filings have lifetime loss ratios lingering in the range of 102% – 118%, with 106% being the most recent. Sustaining this range when the minimum statutory lifetime loss ratio (MLLR) is 60% (or 80%) can guarantee year after year filings for rate increases as AEG has done — 10 rounds of increases since 2009 many on the mild side 10% or 15%, sometimes overlapping. Cumulatively they amount to ~3.3x original premium. What a business!

Cloning Experiment

For this experiment, we took a 2012 rate filing (AEGJ-128207180), cloned it, and gave it an artificial filing date of 2020. Both were given the same rate history. Applying our Consumer View app, we find both the original and the clone have a Step Down (SDN) of ~1.92, a validation of the cloning procedure. SDN assumes: PHs are not responsible for past losses; identifies a level premium given carrier’s claims history and expense projections (CEP); the so-called fair premium is a multiple of a PH’s original premium.

Outcome

The 2020 clone Step Up (SUP) was 11.96 : 5.09 or 2.35x the 2012 filing (SUP). The corresponding annualized compounded increase necessary in 2020 to achieve the minimum statutory lifetime loss ratio (MLLR) is 20% whereas only 14% in the 2012 case.

Policyholder’s vulnerability to rate increases in the 2020 clone case has nothing to do with the industry’s standard lament! It is exclusively due to  a dwindled PH count, shouldered with the burden to correct the book to the MLLR in a shortened time window. If we were to clone 2012 as a 2025 case, the results would be significantly worse.

The current flawed LTCI modeling framework is a great scheme for carriers, even if they do not perform risk-base horizon scanning. Why make the effort? More work and they are already winning. Not such a great scheme for regulators/NAIC, whether or not they are aware of it.

Categories
Long Term Care Insurance

LTCI Time Bandit

A couple weeks back, I had a meeting with accounting pros to evaluate the veracity of LTCI industry’s narrative. A question came up that prompted me to perform a time-series analyses on a set of carrier policy forms (aka Books). The work I co-authored for LTCI Rate Adjudication and Neutral study (Oct, 2019) required only latest carrier filings which included rate history to understand premium rate projections. The new question had to do with trending of claim expense projections (CEP) which was not within the scope of the Oct. study.

Here is an excerpt of the never changing Executive Summary boilerplate used in CT for at least the last 10 years for nearly all rate filings:

The company says it is seeking the increase because actual claims costs far exceeded projected costs that were calculated when the product was originally priced. Unlike medical health insurance with premiums set to cover expenses incurred only during the upcoming policy year, long term care premiums are set to cover expenses that are not expected to occur until a distant date, sometimes 20 years in the future. After an actuarial review, the Department determined that the experience on this closed block of business is worse than expected and continues to deteriorate. The statutory lifetime loss ratio of 60 percent has already been met. As a result, the Department agreed that a rate increase is warranted…

Is this true? Well, only a wee bit.

Time Series Experiment

For purposes of an experiment, we used the recent PRU filing as a starter though the discussion below applies to the industry as a whole. First, we introduce terminology from our Oct. research paper that is helpful in answering the question:

    • Step Up (SUP) is a one-time increase to bring the book immediately to CT’s statutory lifetime loss ratio of 60% using LTCI industry’s claim-based model (f-CBM) which we consider flawed. It makes the present inforce responsible for past losses due to carrier under-pricing (mistakes).
    • Rate Neutral (a.k.a. Step Down, SDN) does not make the present in-force policyholders responsible for carriers’ past losses (mistakes).

The Step Down model has these benefits and objectives: (1.) provides future rate stability; (2.) eliminates discriminatory pricing for age-up policyholders; (3.) restores the concept of a level premium product as was intended & suggested at the time of sale, and (4.) provides a contractual level playing field between carriers and policyholders. The Rate Neutral model is the endpoint for rate stabilization or true ups for past overpricing resulting from excessive rate grants. 

For the experiment, we focused on a PRU’s ILTC1 rate filings (CEP 2012, 2016, 2017, 2020) limited coverage only.

Referring to the table below, the metrics of Step Up (SUP) and Down (SDN) represent a multiple of original premium (base = 1.0) now corrected for the modified CEP as actuaries change their CEP in these filings. The SDN metric is reflective of true CEP in a filing and should be considered fair pricing. SUP^ and SDN^ is the growth in both metrics relative to the base year (2012). CB% is the % chargeback if premiums were stepped up now to their SUP values. SDN^/SUP^, the relative growth ratio, is the ratio of CEP to SUP growth.  A ratio < 1.0 is a measure of the degree current policyholders are charged for past losses discounting the effect of CEP. As you can see in the table, the ratio diminishes with time, not a good thing for PHs.

Year SUP SUP^ SDN CB% SDN^ DN^/UP^
2012 4.54 2.43 46%
2016 11.25 248% 3.52 69% 145% 58%
2017 13.5 297% 3.38 75% 139% 47%
2020 19.7 434% 3.52 82% 145% 33%

Why the disparity between SUP and SDN ? While ILTC1 SDN’s moderate growth is tied to deteriorating claims experience, the SUP uses the industry’s flawed claims-based model (f-CBM). A SUP near 20 (in 2020) means premiums should be 20x original using f-CBM. Why so high compared to earlier years? (1) It is an old legacy Book well into its premium life-cycle and, (2) the remaining policyholders are asked to shoulder the burden in a narrowing time window when most premiums should have been paid by now over the Book’s life.

The SUP and SDN difference reflects a past loss chargeback if theoretically regulators were to permit a Shock Lapse (won’t happen for political reasons). Example:  Take 2017. 13.5 (SUP)- 3.38 (SDN) = 10.12, this chargeback would be a shocking 75% (10.12 / 13.5) of the premium. Ridiculous, right? 2020 and beyond would have an increasingly large SUP even if the CEP (SDN) were to remain constant.

Could CEP decline (i.e. claims projection improving!)? In performing a What If Analysis — by taking other claims projections (e.g. use 2010 in place of 2020’s), you find that the SUP / SDN ratio stays about the same and both would be lower yet the relative growth ratio (SDN^/SUP^) stays constant. Still, the carrier might find it profitable to file for a rate increase (if the minimum loss ratio remains above 60%).

The Executive Summary Question

Is their narrative true? Answer: The Executive Summary is misleading because it omits certain critical information — the effect of not citing the industry’s attempt to recover past losses to those policyholders who remain in the Book.

A final note: The CEP of most other carrier filings is often far less volatile and lower than PRU’s ILTCI1. The above discussion is very important for those Consumer Activists or their agents to consider for any carrier.

Categories
Long Term Care Insurance

Another Over The Top In CT

This post is prompted by Prudential’s PRUD-132273692 filing, which includes policy forms ILTC1 – ILTC3. Our interest are ILTC1 and ILTC2, the older books of the filing. The requested increases are:

                • ILTC1 / +176%
                • ILTC2 / +103%
                • ILTC3 / +48.9%
                • ILTC3R / +24.5%

Noteworthy is the late start for ILTC1, the oldest book of the 4 (pre-2000), an 18% increase in 2016 followed by 2 rate increases of 10% (2019) and 15% (effective 2020).

This filing has the same ring as a recent METLIFE filing, one that contains several books across different eras or vintages. For us it is convenient that different vintages appear in one tidy filing as it allows us to more easily construct a consumer timeline & narrative of the LTCI industry.

With respect to the pre-2000 ILTC1, one might ask — what has suddenly changed to request such an increase in one gigantic gulp after twenty years? Policyholders would wind up paying 4.12x original premium if granted, but we wonder if the CT DOI, like they did with Brighthouse’s +173% Well Over The Top request, will table it to bend to increasing pressures within CT and hope for a Hail Mary from NAIC this Fall.

Pending CT legislation known as SB329 proposes the following addition:

If the commissioner determines, in the commissioner’s discretion, that an insurance company, fraternal benefit society, hospital service corporation, medical service corporation or health care center deliberately or recklessly included a misstatement of fact in, or deliberately or recklessly omitted a statement of fact from, a rate filing filed on or after January 1, 2021, that caused a long-term care policy to be underpriced by at least fifty per cent, the commissioner shall refer such rate filing to the Attorney General for an investigation pursuant to section 5 of this act.

I am on record opposing this addition which is redundant with Connecticut General Statutes 38a-665 that disallows the underpricing of insurance contracts already. The question might be which pre-2000 LTCI product isn’t underpriced by 50%? If you do the math, ILTC2 is also underpriced by over 50% and that is for a vintage sold 11/2003 – 6/2008.

What is next for ILTC1? With the increase, ILTC1 still remains at a stratospheric CT lifetime loss ratio of 141%. Our analysis shows that if priced at the statutory minimum loss ratio of 60%, the actuarially justified Shock Lapse premium would be nearly 20x what the ILTC1 policyholder paid in 2015. Makes sense, right? In lieu of the unlikely Shock Lapse scenario, ILTC1 policyholders can expect to experience a 14.5% average compound annual increase until they lapse or go on-claim, whenever than might be.

This is not to pick solely on Prudential. Here is written public testimony from an individual irate about the same issue with Transamerica. After all, the LTCI industry is the problem. You can hear the March 10th testimony including the author who submitted testimony somewhere in the middle.

The SB329 excerpt above seems written more for the industry than the consumer. We track LTCI legislation and will comment further as the legislative session proceeds. Another concern we see in this bill is the emphasis on affordable benefit options (ABO). What does affordable convey? Why the need to put into legislation? Of course we know the answer but will cover later if it stays in legislation. The whole point with SB329 is that it seems to be especially targeted to dismissing early legacy policies, such as ILTC1 and ILTC2.

Update: Examining PRU filings since 2016, we have noted an important change in assumption of their morbidity model that increases claims expense projections and lifetime loss ratios, which are detrimental to policyholders. Against the 2020 filing, we employed What If analysis to arrive at an increase of 0.26x (8%) from 3.25x to 3.51x original premium using our Step Down model (considered fair premium) resulting from the changed assumption. One might consider 8% noise compared to +173% requested increase, but we wonder what other subtle changes might be going on below the surface? Note: Step Down model does not hold policyholders responsible for carrier past losses.

 

 

Categories
Long Term Care Insurance

CT CID LTCI Info Session

The 1 hour 45 minute video of the full presentation held on Jan 23rd, 2020: Connecticut Insurance Department Long-Term Care Insurance Legislative Information Session.

Plenty of irony can be found in this so-called information session.

Presently, no Consumer Activist has a seat on these information panels to present a point-of-view or investigative research that might be favorable to policyholders’ (PH) interests or contest industry claims. Especially at risk with this insular, under-performing industry are PHs with long term time horizons, e.g. – beyond 2025. These PHs wonder about the viability of a product where their cumulative premiums are in the tens-of-thousands of dollars or more. Will their LTCI perform its perfunctory insurance mission? The issue is clearly born out in this session.

Some points expressed below may require the reader to acquire some LTCI background from prior posts.

Starting at 0:21h was a presentation by Vincent Bodner (Society of Actuaries / SOA member), introduced by CT Insurance Commissioner Mais as someone who could present an unbiased look of the industry. Bodner opens with the stated objective of imparting a neutral, non-actuarial discussion of LTCI economics, useful to one new to the subject. The terms unbiased and neutral are used but not defined. What is meant by these terms? Neutral and unbiased with respect to whom or what? At 0:33h, he begins a discussion about Catch Up — how a late recognition of under-saving (aka underpricing) leads to a later need to jack up savings (premiums). Is he explaining this for policyholders or is he scolding the industry for not raising rates when they should have much earlier in the product lifecycle? Catch Up is further described by Genworth’s CEO later in the session.

At 0:38h begins a presentation by the daughter of a policyholder who is on-claim with Genworth with a finale (0.46h) that endorses Genworth. An advert that I would skip. Why not a Consumer Activist in this spot to round out this legislative information session? How about an LTCI agent / broker? Or, a member of the financial planning community? They must have something to say given its importance in retirement planning. What about a member from CT Office Policy & Management (OPM), the agency pushing LTCI Partnership policies? Shouldn’t they be better and more broadly able to say positive things about LTCI and then address the question why they were pushing an apparently experimental product since the early 90s?

The Genworth CEO starts at 0:47h with LTCI standard fare, as though one were a selling agent. At 0:55h, he references the Wallack couple who make their official entry at 1:26h. Here the CEO states that despite the much higher premium the couple pays now (he understates the Wallack’s current premium), LTCI is still a great deal because,  their insurance would cover the enormous LTC cost in this state. This seems to ignore that the Wallack’s have already sunk substantial premiums over the past 25 years that, if invested in the markets could have easily covered the majority of LTC risks. For someone taking LTCI at age 55, as Dr. Wallack did, LTCI premiums are mainly a pre-funding (or investment) expense to cover risks much later (e.g. 80s+). What the CEO presented was a sleight-of-hand financial argument that considers only the couple’s benefit / premiums expectation going forward, known as a future loss ratio, when any PH is mentally factoring their past investment too (i.e. which considers the overall, aka lifetime loss ratio).

Woe is Genworth starts at 1:02h. “$3.6 billion cumulative losses to date. More of your premiums are necessary to build reserves”. The CEO confirms the previous Bodner’s account of the effect of discovering underpricing late in a lifecycle. At 1:05h, he references the use of calculus and factorials to solve the Cost of Waiting / Catch Up (aka savings shortfall) problem. Actually, the exercise only requires 2nd year High School algebra, even if the problem includes the complicating factor or interest on payments. In EXCEL, this is at worst a 3 column spreadsheet with 2 scalars easily solvable by What If Analysis / Goal Seek in less than 5 minutes. Another way to look at the so-called difficult shortfall problem – just use the same methodology to solve the savings problem, but with different input parameters (time to savings goal, target shortfall amount). Calculus and factorials to solve a simple problem? No wonder the industry has issues.

Finally, he hints at Genworth’s own potential insolvency if things don’t pan out, especially if requested price increases are not granted on a timely basis. At 1:09h, it is stated that consumer misconceptions should not get in the way of premium increases, in order for carriers to pay final claims decades from now. “We try to keep premiums at an affordable $1,500 per year though admittedly a lot less coverage”. Why is this industry so keen at un-insuring their aged-up customer base while simultaneously stressing the need for private LTCI to cover the outsized risk (at time of sale)?

At 1:11h, we learn of the 5 stream NAIC task force, working to solve a number of LTCI outstanding critical issues. “Katy, bar the door” – a lot late.

At 1:18h, an audience member dismisses the daughter’s testimony (@0:38h) since it has nothing to do with the more than 100,000 others in CT who have concerns. While her family is receiving benefits, will others be forced to lapse due to heightened premiums that are geared to pushing them off coverage? Will reserves be able to pay out in policyholders with long term horizons? The LTCI industry complains about having offered lifetime benefits, 5% compounded and how these have inflated coverage. The industry has forgotten that policyholders had to pay very stiff premiums from the beginning for these Benefit Inflation Options (BIO). An actuarial discussion follows but hard to pick up on the audio. Bodner claims half of the policies were sold with unlimited benefits (CEO says 35%), but a recent Genworth filing covering 370K policyholders currently shows 13.5%.

At 1:22h -1:24h, the Genworth CEO reacts to consumer suggestion that the industry knew from inception their claims projections model were inaccurate. A cynical consumer view is that carriers deliberately underpriced to compete with the 120 or so carriers vying to win business. For argument’s sake let us assume the CEO is correct in saying that the industry did not know much about future claims experience. What this would mean: 1. that the industry knew they didn’t know, 2. did not reveal to consumers or agents they didn’t know, and 3. were selling an untested product. Were legacy policyholders unknowing research subjects for the past 30 years whose purpose was to supply data for the industry to ultimately learn how to manage this business? This might come as a surprise to agents, financial planners, and policyholders. The CEO goes on to say that they still collecting data and are learning. Policyholders continue to exercise their right to sell their own data to this laggard industry, just at higher cost.

The stunner is at 1:24h. The CEO takes a shot, “there still is no LTCI subgroup of Society of Actuaries (SOA)” turning to Bodner seated next to him. This raises questions: 1.) How then is the industry piloted? 2.) Who does Genworth, or any LTCI carrier, rely upon to do their actuarial work? 3.) Are rate filings that are actuarily justified only justified by actuaries skilled in other lines but not LTCI? 4.) Is this a seat-of-the-pants, learn-by-doing industry? 5.) What is he really saying? Hard to believe he pointed the finger at SOA.

1:25h didn’t go well when the State Guaranty Fund (SGF) was brought up by the Insurance Commissioner, which included reference to its coverage limits ($500K per policy in CT). The limit might not be so bothersome to PHs anyway as increasingly they are being forced to reduce coverage by benefit buydowns to get below the SGF cap. You find many consumers saying, “Let the carriers go bankrupt. They made bad decisions and it is not for us to bail insurance carriers out. We’ll take our chances in the Guaranty Fund. Financial institutions come & go (e.g. Bear Stearns, Lehman Bros), yet we all survive”. Under a minute later, we learn from the CEO that no investor would purchase this business (50c on $1) because it is a loser, except apparently China Oceanwide (for Genworth). The CEO claims that perhaps the only solution is the SGF that was nixed by the Commissioner seconds earlier who now cuts the CEO off and says the panel is out-of-time. For some reason China Oceanwide was never brought up during the entire session.

Audience questions are pending. At 1:26h is the Wallack couple who has been in the CT news about their own policy. Very little of what earlier was presented did not seem to resonant with Dr. Wallack for good reason. I do not agree at 1:30h with the Dr. idea of a reasonable rate increase to keep up with health inflation, as this benefit component is a direct pre-funding charge for those policyholders who selected a BIO, whether simple or compound. Why should a non-BIO PH be required to pay for health inflation when their benefit was capped from the beginning? Further, if health inflation should be a key pricing element, why was it never included in the original pricing model? Answer: It was already covered by the excess premium for BIOs.

Where did all the money go!?

At 1:34, one audience member suggested re-opening legacy books to include new LTCI buyers to make it whole for the legacy policyholders. He uses a hypothetical example with made up numbers of 10 million each, 1/2 legacy and 1/2 new. Based on the LTCI history of attracting only 10% of the target market (in an era when policies were severely underpriced) and then for all its highly publicized problems since, where can new buyers be found? Earlier, it was stated 5 carriers are still selling LTCI? So what’s the problem with finding 10 million new policyholders? Should new policyholders be purposed to refinance legacy LTC? Wouldn’t this compound the problem for these new policyholders when it is their turn to go on claim? There is a name to such a scheme.

At 1:38h, legislator Michael D’Agostino asks 2 questions. The first has to do with non-uniformity as it relates to states’ leniency in approving rate filings. Some states have restrictions (e.g. rate caps) that CT and other states view as unfair as their residents allegedly pick up more of the slack to ensure carriers stay solvent. In an industry that admits they don’t have their act together, are still learning, and have no solutions, who is to say whether states that have restrictions are wrong in their view? Are other states’ DOI right in casting a wary eye to an industry that is still learning and has no solutions on the horizon? Who is to say who is right? Probably arguments on both sides, so let’s hear them.

Few people might understand the legislator’s 2nd question. I see it as a very polite knee-cap to CEO’s claim of $3.6 billion cumulative losses which have undercut their LTCI reserves. The issue here can be better understood by a thorough review of the Genworth (Richard Burkhart) case.