What causes additional margins in long-term care policies?

Long-term care (LTC) insurance policies are challenging to price accurately. These products are typically designed to be held over an extended period of time, sustained by a level premium throughout the period. Yet, even when insurers intend to maintain level premiums, experiences that change expectations for future claims (or future investment income) can necessitate a premium increase in order to ensure promised benefits. While less common now, rate increases occurred from time to time with some of the early policies.

In response to these tendencies, the Long-Term Care Insurance Model Act and Regulation was amended in August of 2000 by the National Association of Insurance Commissioners (NAIC) to protect consumers from rate instability. This update requires that the actuary certify that the initial premium rates will be sufficient under moderately adverse conditions. Such an actuarial certification expects that, the actuary will include either implicit or explicit margin in the rates. Although the provision proved to be effective in stabilizing the premium rates, it implicitly increased LTC premium rates at the same time.

Fully insured plans, including those provided by employers, are subject to this regulation in the many states which have adopted the model regulation. 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 margins represent an additional cost to an employer sponsoring a plan or an employee paying the premium.

How can the cost of LTC plans be reduced?

An LTC plan that utilizes self-funding or an alternate funding arrangement can avoid the above described issues. A self-funded plan is one in which employers and/or employees contribute to a fund using a schedule of contributions over time. 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 without paying more than required.

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.