LTCI Phantoms

LTCI phantoms can be found in several areas. Future claims experience, a key justification for rate increases, is frequently referred to as a phantom (or fictional) projection by LTCI Consumer advocates. These projections are based on proprietary actuarial models that serve the rate petitioners’ objectives. Consumer advocates also consider the use of the word solvency a phantom argument for rate increases (i.e. industry protection) by regulatory or legislating agencies. Refer to Solvency blog entry.

One use of the term phantom, however, is constructive for PHs and is found in the following American Academy of Actuaries’ LTCI article “Consideration of Past Losses in Rate Increase Requests. This issue relates to large rate increases that are designed to recapture a carrier’s past losses from alleged policy underpricing from Day 1. As a PH, you might ask, “why should I be responsible for their underpricing mistakes and then only hear about it well into the life of the contract after paying tens-of-thousands of dollars in premiums”? Exactly! One could safely argue that such practice is discriminatory against those class of PHs who have aged-up whereas those class of PHs that did not age-up got a free ride at your expense.

The article does a fine job discussing the background and factors that have led up to rate increases but the Section titled “Premium Shortfalls” is most relevant.

“Although the 2014 NAIC LTC Model Regulation considered past losses, there have been continuing discussions about how to treat past losses in premium rate increase filings, most notably in the 2017–18 discussions among the NAIC Long-Term Care Pricing (B) Subgroup. (Editorial comment: “A day late & a dollar short”)
A few states have developed rules on how to adjust for past losses by assuming the new premium was charged since inception in demonstrating compliance with the minimum loss ratio. This is referred to as the “Phantom Premium” approach. This essentially means a policyholder should pay no more in the future than what he or she would have paid had the insurance company known exactly how experience would develop when the product was originally priced. Using this approach raises some serious concerns, which are outlined below. (Editorial comment: “No charge to PH for carrier past mistakes. They incur the loss based on their mistakes of the past”)

If all the adverse claims experience is expected to be in the future, it follows that there are no past claim losses to recoup, and the higher future premiums are needed to offset the higher future claims. In this case, assuming those higher premiums were paid from the original issue date could expose the insurers to much higher risks retroactively, compared with what they may have believed to be the case when they decided to enter this product line. If this situation arises after, say, two-thirds of the premiums have been paid on a particular policy form, the company could only increase premiums to address one-third of the now- expected additional claims. This approach can cause serious solvency concerns, especially when companies have older blocks of business…”.

Would like to hear industry’s reaction to the following:

  1. What are there about industry solvency issues expressed in ways that are meaningful to PHs? (Otherwise, the industry should keep this topic internal & PHs should keep a deaf-ear.)
  2. The actuary’s point-of-view above suggests that PHs’ premiums are / should be directed to maintain LTCI solvency. What is the justification for PH to solve solvency issues? Was that part of the original contract? (No!)
  3. Without the Phantom Premium theory being applied, it would appear that the history of rate increases was discriminatory against aged-up(s); another way of saying this is a “rob Peter (aged-ups) to pay Paul” scheme. If one were to adopt the Phantom Premium theory, this claim would be eliminated.
  4. If the Phantom theory were now adopted (in a state that formerly did not adopt), what would be the true up to PHs who have paid excess premiums?

Note that none of this addresses the issue of phantom claims projections, as scientific a method for long-range forecasting as the Farmer’s Almanac for weather forecasting.

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Looking at SEC filings

This discussion pertains to a Brighthouse, ex MetLife Insurance CO of Connecticut, SEC Consolidated Financial Report filing period ended December 31, 2007. The intent is to review a typical SEC filing for LTCI treatment but not reflect on a particular LTCI carrier, in this case Brighthouse.

In view of the recent GE whistleblower’s report on GE’s participation in LTCI as a reinsurer and Fitch’s warn on the industry as a whole, we have become interested in the topic of LTCI reinsurance industrywide. SEC 8-K, 10-K or other filings are one source to prune for such interest, including a hunt for specific LTCI reinsurance agreements (a typical example of a reinsurance agreement but not LTCI).

The pruning task was completed for this filing by highlighting sections that discuss LTCI generally and LTCI reinsurance particularly. Since Brighthouse is a large multiline insurer, the bulk of this document is of no LTCI interest, hence the need for selective reading. Even some of those highlighted parts may be difficult for the non-technical reader.

Highlighting starts on PDF page 23, with comments on page 26, 29, 30, both taking a séjour until page 79 then restarting with a significant discussion about reinsurance. There are two noteworthy comments on page 80 – 81. Some of the highlights interspersed the document serve as placeholders to “get back to”.

If you decide not to review the document & all its comments, my first-and-only-pick assertion & response is: Brighthouse / MET CT Assertion (pages 80-81, also listing their reinsurers at the time) “The Company reinsures its business through a diversified group of reinsurers. No single unaffiliated reinsurer has a material obligation to the Company nor is the Company’s business substantially dependent upon any reinsurance contracts. The Company is contingently liable with respect to ceded reinsurance should any reinsurer be unable to meet its obligations under these agreements”. Response: This statement is hard to fathom. It is conceivable that re-insurers have interlocking possibly incestuous relationship. While MET CT in this case could have both a relationship with both re-insurer A & B, MET CT may not be privy to reinsurance agreements between A and B. If, for example, B were to fail, A might fail. MET would be exposed to failures of both. To assess (LTCI) risk exposure at the highest level would require a complete understanding of all reinsurance agreements between all re-insurers, which does not seem possible given an environment of privacy.

Note that the carrier’s assertion predated the Financial Crisis (2007 & later) where it was demonstrated the interlocking of financial instruments, such as mortgage loans, derivatives, etc., (many of these instruments also private or OTC) had a correlated & cascading effect. Is the same true with LTCI?

G.E. and LTCI

Thursday, August 15th was a remarkable day for LTCI watchers. It laid bare some of the core issues & concerns for any LTCI PH. This 170 page document authored by whistleblower Harry Markopolos (“HM”) as it relates to GE as an LTCI reinsurer raises some key questions. I will be watching developments in this case. The comments below represent a “starter” in this new development.

What is a reinsurer? “A reinsurer is a company that provides financial protection to insurance companies. Reinsurers handle risks that are too large for insurance companies to handle on their own and make it possible for insurers to obtain more business (that is, underwrite more policies) than they would otherwise be able to. Reinsurers also make it possible for primary insurers to keep less capital on hand to cover potential losses”. More complete definition from source Investopia.

Markopolos, a forensic accountant, maintains how GE might have cooked its books related to its LTCI reinsurance business. I offer no opinion on that & it will be up to “HM” to defend those allegations. But what are some highlights & key questions from this lengthy document that relates to LTCI in general and PHs specifically?

“HM” claims a unit of G.E. known as “ERAC” took on some of the worst LTCI contracts as measured by loss-ratios of the industry. He uses top-8 LTCI insurers as a basis for his comparisons & analyses. This could mean that LTCI liabilities often the concern of regulators may not with the primary insurer but with G.E., a question that should be posed to the insurance regulator ruling on a carrier’s rate increase request that affects you.

The basic principle to keep in mind is that your insurer may hold some percentage of the LTCI liability but the remainder may be held by one or more reinsurers, such as GE or others (e.g. LifeCare). As a PH, do you have a right-to-know where your Policy Form’s liability is parked as a potential solvency matter — i.e. how much is with a reinsurer versus your carrier? Note that “LifeCare’s Reinsurance Failure Will Ultimately Cost GE $2.2 Billion” according to “HM”, so if his thesis is correct what would GE’s failure as a reinsurer cost primary insurers? I wonder how primary insurers reacted to the news on Thursday, especially those carriers that HM claims have an extraordinary sweet-heart agreement(s)?

One point to note with reinsurance “off-market” contracts it that they are private. I will use one example where privacy obfuscates which party faces certain risks moving forward. It is quite possible for these contracts to include risk hedges, such as a hedge against interest rate moves. If, for example, interest rates move in a direction toward zero, as seems to be the current thought, is G.E. in much worse shape than what even “HM’s” analysis suggests? Or, is there an interest rate hedge contained in contract(s) that protects G.E. at the expense of the primary carrier? It would be interesting to find that out (how exactly?). A perpetual low-rate interest environment is not exactly the LTCI industry’s friend. Nor yours apparently.

To serve your best interests, should you be querying your primary insurer to find out their liabilities, reserve status, degree to which your carrier is reinsured with the likes of GE or LifeCare, the nature of those reinsurance contracts, how this factors in rate filings adjudicated by your regulatory body? If you were to do this, you would be performing the same function as “HM” did for GE except your questions would be at the carrier level. If so inclined, good luck with this.

“HM’s” research was aimed only at G.E., not the LTCI industry in general. However, his methodology is a teaching moment for those who monitor the LTCI industry. As you note above, many questions need to be addressed even if “HM’s” thesis is wrong. He opened a Pandora’s box but maybe not the one he expected.

Other interesting data & points came out of the review of the 170 pages. One piece of data that stood out was Prudential’s $113K average reserve per PH. If this number were to represent all PHs across all carriers, for 7.2 million PHs, the total reserve requirement would be about $800 billion. What percentage do you think is actually being reserved? For that, find Waldo in the 170 pp document and respond below.

The other obvious point in reading the document — this is an industry in turmoil & has been for some time. Some other day for additional salient points, especially those that underlie all the pricing volatility that you have been experiencing.

The meaning of solvency?

We often hear this term in connection with the LTCI industry. It comes up in NAIC meeting minutes and we often hear solvency whispered to somehow suggest leniency in permitting rate increases. Is solvency an important factor in justifying LTCI rate increases for fear that if an insolvency were to occur, a state’s “Guaranty Fund” would be tapped and the whole world would come crashing down? This happened with Penn Treaty and the world seems to continue as is.

Penn Treaty is the largest known LTCI failure which had repercussions on other health insurers as the article points out. “Some health insurers, such as UnitedHealth and Aetna, have challenged the assessment process, arguing that long-term care is more like life insurance. Looking beyond Penn Treaty, Belth said, health insurers are concerned about other long-term care companies going under and saddling them with even more losses”. Carriers doing battle trying to decide whether LTCI is health or life insurance. Nice. When they figure it out, please alert all of us: regulators, legislators, and consumers of “all stripes” as the LTCI failure has seemed to poison the Health insurance pond.

In Penn Treaty’s case, the question of solvency pertained to the entire company as a single line company. PT was not in a position to compensate for LTCI losses with profits from some other line (health, life, P&C, annuities). However, a large multi-line company (call it “BIG”) should be able to offset LTCI losses from other lines, right? All their lines can’t all be doing so badly at the same time, could they?

So regulator concerns about solvency, do these pertain to: (a) the threat of LTCI taking down an entire company? (b) affecting only a company’s LTCI line or division only? or (c) is it an issue on a “per book-of-business” level? Can’t be (b) or (c) could it? (a) seems most likely.

It would seem that BIG(s) should be able to sustain losses in its LTCI line without tapping the policyholder for BIG’s LTCI mistakes. BIG(s) frequently made “financial stability” their closing LTCI argument some going so far as to brag about their score from rating agencies. Did these agencies rate according to (a), (b), or (c) above? As a practical matter, how could any rating agency drill down to the level of a “book of business”? Let’s stick with (a) for simplicity.

We have been told that the State Guaranty Funds kick-in only when the failure is at the company level. Seems (a) would get yet another vote based on logical consistency.

If BIG is a public company, where do its company shareholders fit in all of this? Aren’t they somehow on the hook for their company’s poor LTCI business decisions or is LTCI “cordoned off” (b, c)? Our vote again for (a).

Rather than to assume anything above, the most appropriate step would be to hear from those who are using this term most often. What does “solvency” refer to exactly? What are its true implications & effects, particularly on LTCI PHs. Otherwise, to simply throw the term around in blanket use is inappropriate especially when used to justify rate increases at the book-of-business (policy form) level.

Since the original post on this subject, we have learned officially that the answer is (a).

‘Inadequate Rate’ Violations

Refer to “III. Discussion”, pages 5 – 6, of the document (SERFF Tracking Number META-127151622, aka (CT) State Tracking Number 201181606, pertaining to a MET filing in 2012 re: TIAA-CREF).

The following argument was put forth to justify the applicant’s (MET) rate increase.

“While the terms excessive, inadequate nor unfairly discriminatory are not defined, the Legislature has given us guidance as to their meanings through other statutes dealing with rate filings. Conn. Gen. Stat. §38a-665, which addresses rates pertaining to commercial risk insurance:

Rates shall not be excessive or inadequate, as herein defined, nor shall they be unfairly discriminatory. No rate shall be held to be excessive unless (1) such rate is unreasonably high for the insurance provided or (2) a reasonable degree of competition does not exist in the area with respect to the classification to which such rate is applicable. No rate shall be held inadequate unless (A) it is unreasonably low for the insurance provided, and (B) continued use of it would endanger solvency of the insurer, or unless (C) such rate is unreasonably low for the insurance provided and the use of such rate by the insurer using same has, or, if continued, will have the effect of destroying competition or creating a monopoly”.

  1. It is interesting to note that the LTCI rate justification argument borrowed from Commercial Risk Insurance. It also borrowed from CT Agencies Reg. §38a-474-3, which governs rate filings for Medicare Supplement & uses similar language.
  2. The applicant then goes on to state “the actuarial review of the rate Application to determine if the rates are reasonable, i.e. not excessive, inadequate or unfairly discriminatory, must be in compliance with ASOP 8 issued by the Actuarial Standards Board of the American Academy of Actuaries” and defends the rate application as not resulting in being excessive, inadequate, or unfairly discriminatory.

Let’s instead turn this argument on its head:

  1. It logically follows that prior to the rate application, rates were not reasonable given their inadequacy. Is this a violation of Conn. Gen. Stat. §38a-665 (A & B above)? Given the size and scope of rate applications by nearly all carriers since 2012, can one conclude that Conn. Gen. Stat. §38a-665 was violated en masse?
  2. Not only that, rates were inadequate from the beginning, in most instances for well over a decade. Carriers often reference the unusually low lapse rate as a part justifier for a rate increase. But this was known “right out of the gate” by LTCI carriers as being problematic.

So why didn’t carriers address the issue of inadequate rates when it was first known?

The inadequate rate violations have caused LTCI consumers great harm.

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