Long-term Care Insurance: Basic Pricing and Rate Increase Concepts - PowerPoint PPT Presentation

Long-term Care Insurance: Basic Pricing and Rate Increase Concepts November 17, 2017 Presented By: Vincent L. Bodnar ASA, MAAA

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Disclaimer This presentation is intended for educational purposes only and does not replace independent professional judgment. Statements of fact and opinions expressed are those of the individual presenter and, unless expressly stated to the contrary, are not the opinion or position of the Society of Actuaries, its cosponsors, its committees, or the presenter’s employers. The Society of Actuaries does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented. 3

PURPOSE Purpose ▪ To provide a basic explanation of: • Long-term care (LTC) insurance product features • Pricing • Reserves • Premium rate increases ▪ The explanation is very simplified and meant for a non-technical audience 4

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LTC INSURANCE BASICS LTC Insurance Benefits MANY POLICIES ALSO REQUIRE RECEIPT OF LTC UPON DISABILITY SERVICES LTC INSURANCE PAYS OUT… ASSISTED AT NURSING LIVING HOME HOME FACILITY 6 6

LTC INSURANCE BASICS LTC Insurance Benefits Limit on total amount paid out Many policies do not pay: Not a • During the entire disability episode lump sum: • Until the disability lasts a certain amount of time a benefit is paid By law, policies each day must cover the up to a maximum insured for his benefit per day entire life while he pays premiums • Option to automatically increase benefits each year is offered at purchase, so they keep up with increases in costs of care 7 7

LTC INSURANCE BASICS The Chance of Using Benefits LOW chance of use HIGH chance of use CHANCE OF USE RIGHT AFTER MARRIED INDIVIDUALS + AGE PURCHASING COUPLES LIVING ALONE COVERAGE YEARS AFTER BUYING COVERAGE 8 8

LTC INSURANCE BASICS Premiums Premium rates do not increase with age. THIS CREATES However, claims are expected to increase over time. A CASH FLOW MISMATCH FOR INSURERS. $ AMOUNT TIME 9 9

LTC INSURANCE BASICS Premiums $ Premium rates do not increase with age. $ However, claims are expected to increase over time. Insurers must set aside some of the premiums in early years in a reserve . $ AMOUNT TIME 10 10

LTC INSURANCE BASICS Premiums $ Premium rates do not increase with age. $ However, claims are expected to increase over time. Insurers must set aside some of the premiums in early years in a reserve . Insurers use this reserve to fund claims in later years. $ AMOUNT TIME 11 11

LTC INSURANCE BASICS Setting Premiums Aside POLICY ADMINISTRATION AGENT COMMISSIONS STATE & FEDERAL TAXES Premium DISTRIBUTION TO SHAREHOLDERS AS PROFIT dollars are used as follows: RESERVE FUND TO PAY FUTURE BENEFITS 12 12

LTC INSURANCE BASICS The Reserve is Like a Savings Account $ $ $ $ Net premiums Benefit payments DEPOSITS WITHDRAWALS 0 0 Like a savings account, it earns INTEREST • The savings account is held for the benefit of all the policyholders. • It can only be used to pay benefits for those who become disabled. • It is not paid to people who die or stop paying premiums. 13 13

LTC INSURANCE BASICS The Net Premiums are Like Scheduled Deposits The scheduled deposit amount Amount that will be withdrawn (premium rate) is (benefit payments) determined at the Interest rate that will be earned beginning based on estimates about: If either of these $ estimates are different, SAVINGS the account may not PAYMENT ACCOUNT have enough to cover Low future withdrawals. Funds 14 14

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WHAT CAN GO WRONG? Interest Rate 0 0 The interest can change if the economy changes. Changes in economic conditions in the past 20 years have led to a dramatic drop in interest rates. Many companies assumed that interest rates would be Rates have dropped 6% to 8% when products to 3% to 4% were priced in the 1990s 16 16

WITHDRAWALS Withdrawals From the Savings Account The amount of funds withdrawn is dependent on key things: The number of people that keep their policies up to the point when benefits begin to be paid LATER YEARS WHEN POLICIES ARE ISSUED INSURED ASSUMPTION USES BENEFIT INSURED REALITY USES BENEFIT More people have kept their policies than originally expected. People are also living longer than originally expected. 17 17

WITHDRAWALS Withdrawals From the Savings Account Of the people who keep their policies, the number of people who use benefits LATER YEARS WHEN POLICIES ARE ISSUED INSURED ASSUMPTION USES BENEFIT INSURED REALITY USES BENEFIT Industry experience has been mixed compared to what was originally thought. 18 18

WITHDRAWALS Withdrawals From the Savings Account Amount that is paid out to people who use benefits Recall that a lump sum benefit Amount paid will not be is not paid when known in advance. a person becomes disabled. It will depend on: This amount paid • Number of days is estimated of disability based on past • Intensity of care • observations. Cost of care Length of time in nursing homes has not changed much. However, more people are receiving care in assisted living facilities, where people live longer. This has led to higher benefits being paid. 19 19

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EXAMPLE A Simple Savings Plan Example ORIGINAL GOAL: $10,000 in 10 years $12,000 $10,000 $8,000 $6,000 $4,000 $ SAVED CURRENT YEAR $2,000 $ SAVED PREVIOUS YEAR(S) $0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10 21 21

EXAMPLE When Not Enough is Saved: Need to “Catch - Up” ORIGINAL GOAL: $10,000 in 10 years NEW GOAL AFTER 6 TH YEAR: $12,000 is needed by 10 th year $12,000 $1,500 Needed to increase $10,000 deposits by 50% $1,500 (to $1,500) to meet goal $1,500 $8,000 $1,500 $6,000 $ CATCH-UP $4,000 DEPOSITS $ SAVED CURRENT YEAR $2,000 $ SAVED PREVIOUS YEAR(S) $0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10 22 22

EXAMPLE With Hindsight THE “HINDSIGHT” DEPOSIT SCHEDULE $12,000 Needed to increase $10,000 deposits by 20% (to $1,200) to meet goal $8,000 $6,000 $4,000 $ SAVED CURRENT YEAR $2,000 $ SAVED PREVIOUS YEAR(S) $0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10 23 23

APPLICATION Application of the Simple Example: How it Should Work In this example of a block of LTC policies, at a given point in time: reserve fund (savings account) + future net premiums (deposits) are enough to pay for future benefits (withdrawals) EXAMPLE: NET PREMIUMS (DEPOSITS) AND THE RESERVE This model FUND ARE ENOUGH TO FUND FUTURE BENEFITS shows the two sides in balance. FUTURE NET FUTURE BENEFITS PREMIUMS RESERVE FUND 24 24

APPLICATION Out of Balance In this example of a block of LTC policies, at a given point in time: reserve fund (savings account) + future net premiums (deposits) are NOT enough to pay for future benefits (withdrawals) EXAMPLE: EXPECTED FUTURE WITHDRAWALS OUTWEIGH The two sides are THE DEPOSIT SCHEDULE out of balance. FUTURE BENEFITS There will not be FUTURE NET enough money to PREMIUMS fund benefit RESERVE payments. FUND 25 25

APPLICATION Restore Balance: Premium Rate Increase In this example of a block of LTC policies, a premium rate increase is implemented to restore balance: reserve fund (savings account) + future premiums with rate increases (deposits) are enough to pay for future benefits (withdrawals) EXAMPLE: PREMIUM RATE INCREASES RESTORE BALANCE Balance is restored via rate CATCH-UP PREMIUM RATE FUTURE BENEFITS increases. INCREASE FUTURE NET PREMIUMS RESERVE FUND 26 26

APPLICATION Restore Balance: Include Other Funding In this example, a premium rate increase is implemented, but it is not enough to restore balance: reserve fund (savings account) + future premiums with rate increases (deposits) are NOT enough to pay for future benefits (withdrawals) Other funding must EXAMPLE: BALANCE RESTORED THROUGH OTHER FUNDS come from: INSUFFICIENT PREMIUM Company surplus: FUTURE BENEFITS RATE INCREASE one- time “deposit” OTHER which is ultimately from FUNDING other policyholders or shareholders. FUTURE RESERVE NET FUND PREMIUMS Other policyholders: Taken as needed from premiums of other policyholders 27 27

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