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.

Author: Samuel Cuscovitch

Research scientist / strategist.

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