A couple weeks back, I had a meeting with accounting pros to evaluate the veracity of LTCI industry’s narrative. A question came up that prompted me to perform a time-series analyses on a set of carrier policy forms (aka Books). The work I co-authored for LTCI Rate Adjudication and Neutral study (Oct, 2019) required only latest carrier filings which included rate history to understand premium rate projections. The new question had to do with trending of claim expense projections (CEP) which was not within the scope of the Oct. study.
Here is an excerpt of the never changing Executive Summary boilerplate used in CT for at least the last 10 years for nearly all rate filings:
The company says it is seeking the increase because actual claims costs far exceeded projected costs that were calculated when the product was originally priced. Unlike medical health insurance with premiums set to cover expenses incurred only during the upcoming policy year, long term care premiums are set to cover expenses that are not expected to occur until a distant date, sometimes 20 years in the future. After an actuarial review, the Department determined that the experience on this closed block of business is worse than expected and continues to deteriorate. The statutory lifetime loss ratio of 60 percent has already been met. As a result, the Department agreed that a rate increase is warranted…
Is this true? Well, only a wee bit.
Time Series Experiment
For purposes of an experiment, we used the recent PRU filing as a starter though the discussion below applies to the industry as a whole. First, we introduce terminology from our Oct. research paper that is helpful in answering the question:
- Step Up (SUP) is a one-time increase to bring the book immediately to CT’s statutory lifetime loss ratio of 60% using LTCI industry’s claim-based model (f-CBM) which we consider flawed. It makes the present inforce responsible for past losses due to carrier under-pricing (mistakes).
- Rate Neutral (a.k.a. Step Down, SDN) does not make the present in-force policyholders responsible for carriers’ past losses (mistakes).
The Step Down model has these benefits and objectives: (1.) provides future rate stability; (2.) eliminates discriminatory pricing for age-up policyholders; (3.) restores the concept of a level premium product as was intended & suggested at the time of sale, and (4.) provides a contractual level playing field between carriers and policyholders. The Rate Neutral model is the endpoint for rate stabilization or true ups for past overpricing resulting from excessive rate grants.
For the experiment, we focused on a PRU’s ILTC1 rate filings (CEP 2012, 2016, 2017, 2020) limited coverage only.
Referring to the table below, the metrics of Step Up (SUP) and Down (SDN) represent a multiple of original premium (base = 1.0) now corrected for the modified CEP as actuaries change their CEP in these filings. The SDN metric is reflective of true CEP in a filing and should be considered fair pricing. SUP^ and SDN^ is the growth in both metrics relative to the base year (2012). CB% is the % chargeback if premiums were stepped up now to their SUP values. SDN^/SUP^, the relative growth ratio, is the ratio of CEP to SUP growth. A ratio < 1.0 is a measure of the degree current policyholders are charged for past losses discounting the effect of CEP. As you can see in the table, the ratio diminishes with time, not a good thing for PHs.
Why the disparity between SUP and SDN ? While ILTC1 SDN’s moderate growth is tied to deteriorating claims experience, the SUP uses the industry’s flawed claims-based model (f-CBM). A SUP near 20 (in 2020) means premiums should be 20x original using f-CBM. Why so high compared to earlier years? (1) It is an old legacy Book well into its premium life-cycle and, (2) the remaining policyholders are asked to shoulder the burden in a narrowing time window when most premiums should have been paid by now over the Book’s life.
The SUP and SDN difference reflects a past loss chargeback if theoretically regulators were to permit a Shock Lapse (won’t happen for political reasons). Example: Take 2017. 13.5 (SUP)- 3.38 (SDN) = 10.12, this chargeback would be a shocking 75% (10.12 / 13.5) of the premium. Ridiculous, right? 2020 and beyond would have an increasingly large SUP even if the CEP (SDN) were to remain constant.
Could CEP decline (i.e. claims projection improving!)? In performing a What If Analysis — by taking other claims projections (e.g. use 2010 in place of 2020’s), you find that the SUP / SDN ratio stays about the same and both would be lower yet the relative growth ratio (SDN^/SUP^) stays constant. Still, the carrier might find it profitable to file for a rate increase (if the minimum loss ratio remains above 60%).
The Executive Summary Question
Is their narrative true? Answer: The Executive Summary is misleading because it omits certain critical information — the effect of not citing the industry’s attempt to recover past losses to those policyholders who remain in the Book.
A final note: The CEP of most other carrier filings is often far less volatile and lower than PRU’s ILTCI1. The above discussion is very important for those Consumer Activists or their agents to consider for any carrier.