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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Author: Samuel Cuscovitch

Research scientist / strategist.

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