LTC 1.0: Play Stealing or First Principles?

What are First Principles? And what is this business about Play Stealing?

Best to learn from the following easy to read description.

How is any of this relevant to LTC 1.0?

One could claim that LTC 1.0 carriers were Play Stealing (a derogatory term) rather than utilizing First Principles in designing LTCI. Experimenting in other words — borrowing from what worked in other lines of business (e.g. Life Insurance) that might not have had relevance to LTCI.

How can one make that claim!?

I don’t have to. See for yourself in this American Academy of Actuaries’ Jan 2019 draft document.

In this truly useful source for those with a tech interest in LTCI, you learn or might ask:

  1. Is it true that, “proposed practices for long-term care (LTC) actuaries to better understand the considerations in evaluating experience, setting assumptions, valuation, and financial reporting — have not substantially been upgraded since 1995”? Seems an awfully long time.
  2. First Principles is a novel approach for the Industry, not widely implemented due to its complexity? (p4: “Current carrier actuarial software may not have the capability for first principles modeling”) If true, why then unleash a complex product (LTC 1.0) onto the public for which there is not complete understanding of its behavior?

You will be pleased to know: p28, “The industry is moving from claim-cost models to first-principles. The decision is whether streamline the models across the entire block or just for new business. Eventually claim-cost models won’t be updated with experience and won’t be useful for understanding in-force blocks”.

When? “Management of the overall project can be a challenge. A typical first-principles project requires a large volume of systems work, actuarial work on models, experience studies and assumption development, audit and control work, and financial management to rigorously analyze, understand, and explain any changes in view arising from the new model. For most companies this is a multiyear project”. Not soon enough.

Summary comment: A certain low-tech-ness about this Industry, not beneficial to participants who happen to come in contact, especially PHs.

An LTCI Bible of a Sort

Lengthy. Covers the subject well, including solutions for the future that many of us here are not interested in because we have a “legacy” product. Many references. Scribed in 2016. Maybe not for the LTC 1.0 Beginner but you can judge for yourself.

Especially relevant to LTC 1.0 is the Section titled “Insurer In-Force Long-Term Care Insurance Management“, pp 71 – 75 (different than PDF page numbering).

Particularly relevant is Subsection titled “Corrective Actions“

  • Premium rate increases. The ability to correct reserve deficiencies completely with premium rate increases diminishes quickly in the later policy durations. This is because the amount of premium collected in later years is much less than benefit payments and there are fewer policyholders paying premium, which causes the level of rate increase needed to restore reserve adequacy to be very large.
  • Benefit reductions. An approach becoming more common in recent years among insurers is to offer policyholders the option to reduce benefits in lieu of premium rate increases (after rate increases have been approved by the regulator). As an example, a policyholder may reduce his or her daily benefit, benefit period or inflation benefit option to offset the effect of a premium rate increase.
  • Recognize losses. In many cases, premium rate increase requests and benefit reduction offers have not been sufficient to restore reserve adequacy and fund future benefits. In such cases, insurers were required to recognize reserve deficiencies and post additional reserves, typically at the expense of insurer surplus or profits from other products. If the insurer has inadequate surplus, or is a mono-line LTC insurer, options for subsidizing losses may not exist.

No further comment. You make your own call.

Know Your Policy…

Basic 101 in LTCI policyholder (PH) management. Sounding pedantic in this piece, yet still important since there is a certain Play By Rules in effect. Without a base of knowledge of essential policy info in discussions with others — mere “noise”.

If you’re the PH (the Insured) or acting on behalf of (e.g. Power of Attorney, Estate Administrator, or otherwise given right to act): find the policy and especially note the cover page that lists essential information:

  • policy number & plan number;
  • covered services & benefits at the time policy was taken;
  • inflation protection;
  • whether the plan is a Partnership policy or not;
  • elimination period, expressed in days normally no greater than 100 days
  • Riders, many types of
  • Marketing material

Additional correspondence with your carrier since policy was taken, such as benefit upgrades / downgrades; premium change notifications; claim activity (acceptance or denial).

Updated contact information is vital. Carrier phone numbers found within the contract may have changed. Call your carrier once in awhile to see who answers & how well they handle a key question. What’s a key question? Hmmm.

Have there been or are there currently any actions taken against your carrier that can affect your status or outlook on your LTCI? Presently, there is one pending v. GE / Genworth for those PHs to note and a case of general interest to any PH.

Having this information readily available enables one to Act. Without essential information it is very difficult to communicate to carriers, DOI, advisors, or any other participant on an issue. For examples, an official complaint about your contract to CT DOI requires the Policy number.

I have personally found the interaction to go smoothly with (my) carrier once this information is available & I have familiarized myself with its contents. I have reached 3rd level support successfully on a matter of some complexity.

One of the more difficult aspects in LTCI is your plan’s design. You may recall when you took LTCI out in the beginning (maybe some 20 years ago), there were many design choices, such as : Maximum Daily Benefit (choices different for nursing home v. home care); % inflation protection (compound, simple, none); elimination period; years of coverage (affecting the Lifetime Benefit max). Are the design parameters are still relevant given your current health & financial state? It may be that your plan is over-configured and you are paying excess premium & are too exposed to rate increases. You can potentially downgrade coverage but you should seek advice first. Does the carrier have an LTCI agent that can help explain options, whether or not a trusted source for advice?

One of the more curious changes that has occurred relates to (CT) Partnership minimum contract specifications – the % compound inflation of benefits. For most reading this, yours is probably 5% but now Partnership is 3% and has had stops in-between (e.g. 3.5%). Something squirrely about the reduced % since these values are intended to represent fixed long-term % rise in LTC costs. If your contract is 5%, does the current 3% suggest your plan is over-configured because the 5% overstates the long-term LTC cost of services inflation? Take my opinion as a salt-grain: I don’t think so. Flipping the question — is a contract with a 3% compound inflation potentially under-configured long-term? I would like an expert opinion to justify the reduction of 5 to 3% since the 20 year average still remains ~5% despite recent 5-year period where it is close to 3%.

What options can you exercise with respect to your policy? The contract should specify these and are important to know.

Here’s a link that seems relevant to all PHs but requires significant reading & interpretation. There’s more underlining than not so it takes some effort to dissect that meaning.

The key question for most on this blog — this was signed off June 24, 2009, does the non-forfeiture benefit (incl. CBUL) apply to policies prior to that date? If the answer were yes, is the wording so clear as to determine how it would apply in your case? If the answer were no, why are pre-2009 policies excluded? What precipitated CBUL in 2009 and not before?

What is my LTC 1.0 policy worth?

This is a vital question as it underlies what actions one might take in view of numerous factors. This one has no easy answer and requires a series of posts over time. This post is for “starters” and some of the discussion is admittedly sublime. Cases to start.

Case 1: A policyholder (PH) has been diagnosed with 2 Activities of Daily Living (ADLs) to trigger a claim. That would seem to suggest the policy might be worth as high as its Benefit Maximum, but no greater. There are factors to reduce the actual benefit paid out, contract factors such as: Elimination Period, rate of benefit payout, whether mortality may precede payout of the benefit maximum. Another factor is cost of LTC care in one’s locality. Note even this simple case is probabilistic & so requires a bit of quantitative skill to determine expected benefit payout. Despite this case’s potentially high financial value, no one hopes for 2+ ADLs so a PH is not really striving to maximize his or her policy worth.

Case 2: A PH has been diagnosed with 1 ADL. The question might be: Given 1 ADL, what is the likelihood of 1 more ADL (in some subsequent time period – let’s use “years”) to trigger a claim assuming the PH does not pass first? Here there is the notion of paying premiums while “waiting” for the 2nd ADL. Given that we have discovered the product is not level premium, other considerations would be carrier rate increase requests and Dept. of Insurance policies to grant those requests. Then there is the notion of Net Present Value (“NPV”, an alternate term to “worth”) to “discount” future premium payments and benefits to current (2019) dollars to determine your policy’s current NPV. Clearly, the mathematical model to determine NPV is much fuzzier & more difficult than Case 1.

Case 3: No ADLs, typically a younger PH but not necessarily. A much fuzzier model still. This model might even consider a probabilistic behavioral model: carriers’ ability & willingness to pay claims in some distant future. How about a change in DOI regulations or behavior as it relates to rate request grants? Can such a model be developed? Such, why not? This is well within today’s computational arts & sciences.

Who has such models today? Very unlikely, Consumers. Very likely, insurance actuaries. You would hope actuaries are fully up to speed with computational arts & sciences to manage their business risk exposure. Are they good models? Who really knows, but how did the industry get to where it is now? They claim not to have predicted LTC claims & costs, but other factors as well (some of which do not pertain to a consumer model).

Shifting to a different topic & point-of-view:

Question, a bit sublime: Nationwide, is the sum of all LTC 1.0 policyholders NPV greater, less than, or equal to $0?

Answer: Well, if I were to believe Industry statements, I would say greater (disagree if you’d like).


Speaking broadly about the industry (not individual PH cases as the issue of one PH’s NPV depends on several situational factors – such as the insured’s age, health, financial state), the liability on carriers’ books (broadly, a -NPV) is an asset on PHs’ books (broadly, a +NPV).

One might say the carriers’ are claiming an NPV imbalance that currently favors PHs though they might express that using terms more familiar to the Industry. (Note: I would submit the Consumer side can use terminology / vocabulary it considers relevant & applicable.)

The carriers’ have claimed LTC premiums were underpriced originally and now must reduce their liability to shift the NPV imbalance more to their favor by taking actions, one that is very visible — raising premiums. One should be on the lookout for other actions to reduce PHs NPV (aka a “loss of worth”).


If a PH were to blindly surrender their policy (simply out of fear of rising premiums), that would likely constitute a loss not knowing their policy’s worth. Not recommended.

This may seem counter-intuitive: A small, sustained increase in premium does not necessarily mean a reduced PH NPV over time. Yes, this may not be what was bargained for or understood at the time of signing, but if your contract’s NPV >> $0, you may be holding a contract which is a very good deal, way too good in carrier’s eyes. Requires a more comprehensive model to make an assessment.

More often it is the case where a deservedly angry PH witnesses the current LTC 1.0 debacle, wants out, and wants a full return on all premiums paid to date with interest. Now that settlement calculation is an easy Excel NPV exercise for a “Quant”. But whether that is a better deal than an alternate action (staying put; downgrade policy benefits) with a different NPV result — that’s a tough question to answer without that more elaborate model yet to surface on the Consumer side.

More on this complex subject. Later.

NAIC Apr 2019 Minutes

Reading these minutes can be disconcerting if you have a “legacy” LTC 1.0 product which I am sure you have if you are on this blog. “Legacy” has a bad ring to it, like “forgotten”, “inferior, old generation product”. In Information Technology, companies will often communicate to their customer base that as of a certain date, no longer will the company provide customer support to one of their legacy products. Any of you running Windows 3.0/2000/XP? Will we see that day here? — a concern for those who expect to hold their policy to some distant future time.

Section 3. Ouch!

Sample: “Mr. Slape noted that with respect to the pricing issue, the environment for getting rate increases is one where there is a lot of inconsistencies among the states. He stated the timing of getting rate increases is also having an impact on solvency because delaying rate increases is a negative to solvency.”

Interesting to find out : What is CT Consumer’s grade relative to Consumer’s grade in other states on the issue of rate increases? Is CT, for example, protecting solvency while another state is more concerned about protecting Consumer’s at the risk of solvency? That’s a weird question, huh?

More: “Mr. Slape also addressed the concern that exists when the consumers may not be given the choice to make their own decision, given all states have limits on what can be collected under guaranty fund coverage if an LTCI insurer goes insolvent. He stated that Texas has seen companies requesting too little of rate increases, even though the actuarial justified data suggests otherwise. He noted the importance for companies to request the right rate; otherwise, the industry is potentially misleading consumers regarding what the true cost of the policy may be currently and in the future”.

Questions: Do Consumers have the Information to make their own decision? Is vital Information being withheld (deliberately or not)?

Even bigger question: Are Consumers aware that this question of “solvency” is even being bandied about? Is that considered Vital Information that Consumers should be aware of? More about Vital Info later in a separate post as it relates to a current action v. G.E. / Genworth (that I refer to as “Claim 3”).

Not to ignore Section 4. our CT DOI rep: “Mr. Lombardo indicated that the Subgroup had discussed at length the potential cross-state policyholder inequity/cross subsidization of LTC rates. He noted that there is a growing concern on behalf of those states that traditionally have approved requested rate increases that an inequity is created between their consumers and consumers in the states that have either not approved rate increases or have approved significantly lower rate increases”. Only comment here: Refer back to Interesting to Find Out.

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