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.


Author: Samuel Cuscovitch

Research scientist / strategist.

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