MANAGEMENT
REGULATORY REFORM FOR LTCI VIABILITY
Session 22: February 27, 2006
Session Producer:
Sharon Reed, Asst Vice President
Strategic Operations
Penn Treaty Network America
MANAGEMENT
Regulatory Reform for LTC Viability
John HartnedyFormer Arkansas Deputy Commissioner
Mark LitowMilliman
Cameron WaitePenn Treaty Network America
3
MANAGEMENT
Session Format
This interactive session will provide opportunity for questions and discussion
after introductory comments from the panelists.
4
MANAGEMENT
Introduction
• What’s Changing? Who’s Changing It?
• Actuarial Influence on Public Policy
• Updates beyond Washington
MANAGEMENT
John Hartnedy
Former Arkansas Deputy
Commissioner
6
MANAGEMENT
Overregulation
• Federal Government
• State Government
• Hinders product development
• Creates excessive work
• Limits rate competition
• Limits capital
7
MANAGEMENT
Disclosure
• IMSA- an example of an overall approach
• Industry association needs to police itself and publish results
• Industry is not creative enough!
8
MANAGEMENT
Reserves
• Formulaic covers about 80% of companies
• Fair market value and Enterprise Risk Management are coming…
• Independent actuaries need to certify results.
MANAGEMENT
Mark E. Litow, F.S.A.
MillimanConsultants and Actuaries
10
MANAGEMENT
Results of Current Reserving Requirements
• Strong tendency for increasing Statutory and GAAP margins due to Persistency/Morbidity/Interest Direction / recent RBC exception
• High Increase in artificial margins and back load income / Statutory and GAAP
• Results– Break even period increases– Cost of capital high (including risk based capital formula
mismatch)– High taxes– Companies’ financial situation harmed / premiums increase– Companies more reluctant to enter/stay in business
11
MANAGEMENT
LTC Statutory Contract Reserves
Mortality:– 1994 Group Annuitant Mortality Table (GAM)
for Policies Issued in 2005 and laterSample Cell (Age 65)
Scenario IRR Premium
Base: 1983 GAM 15.0% $2,910
1994 GAM 13.15% $2,910
1994 GAM 15.0% $3,000
12
MANAGEMENT
LTC Statutory Contract Reserves
LapsePrior to 2005 2005 and Later
For policy years 1-4, the lesser of 80% of the voluntary lapse rate used in the calculation of gross premiums and 8%
For policy year 1, the lesser of 80% of the voluntary lapse rate used in the calculation of gross premiums and 6%
For policy years 5+, the lesser of 100% of the voluntary lapse rate used in the calculation of gross premiums and 4%
For policy years 2-4, the lesser of 80% of the voluntary lapse rate used in the calculation of gross premiums and 4%
For policy years 5+, the lesser of 100% of the voluntary lapse rate used in the calculation of gross premiums and 2%, except for group insurance as defined in [Section 4E(1) of the NAIC LTC Insurance Model Act] where the 2% shall be 3%.
13
MANAGEMENT
LTC Statutory Contract Reserves
Lapse Sample Cell – Age 65
Priced for Lapse 9%, 7%, 5%, 3%, 2%, 1.5%
IRR Premium
Prior to 2005 15% $3,000
2005 and Later 15% $3,000
Sample Cell – Age 65
Priced for Lapse 9%, 7%, 5%, 3%, 3%
Prior to 2005 2005 and Later
IRR Premium
Prior to 2005 15.0% $2,640
2005 and Later 12.8% $2,640
2005 and Later 15.0% $2,750
14
MANAGEMENT
LTC Statutory Contract Reserves
Interest:– NAIC Model “… Maximum rate permitted by
law in valuation of whole life insurance …”– 4% in 2006
Sample Cell (Age 65)
Scenario IRR Premium
Base: 4.5% Valuation Rate 15.0% $3,000
4.0% Valuation Rate 13.3% $3,000
4.0% Valuation Rate 15.0% $3,100
15
MANAGEMENT
LTC Statutory Contract ReservesMethod:
– 1 Year Preliminary Term (since 1/1/92)
Morbidity:– “Valued using tables established for reserve purposes
by a qualified actuary and acceptable to the commissioner.”
– “In determining the morbidity assumptions, the actuary shall use assumptions that represent the best estimate of anticipated future experience, but shall not incorporate any expectation of future morbidity improvement.”
16
MANAGEMENT
LTC Risk Based Capital
Current: • 25% of first $50 million earned premium• 15% of earned premium in excess of $50 million• 5% of claim reserves
New:• 10% of first $50 million earned premium• + 3% of earned premiums in excess of $50 million• + 25% times first $35 million in incurred claims• + 8% times incurred claims in excess of $35 million• + 5% of unpaid claims reserves• + 10% non-can additional charge
17
MANAGEMENT
LTC Risk Based Capital
New Pricing (Sample Cell)
IRR Premium
Current RBC 15.0% $3,000
New RBC 18.5% $3,000
New RBC 15.0% $2,910
MANAGEMENT
Cameron Waite
Penn Treaty Network America
19
MANAGEMENT
Industry and Regulators
• Industry– Rate Increases– Expanded agent
commissions– Closed blocks– Company exits
from business line
• Regulators– Consumer protection– Monitoring reserves– Surplus adequacy– Future rate stability
20
MANAGEMENT
• Balancing Consumer Advocacy and Industry Viability
• Regulators role/ Industry role
• Legislation and Regulation at the state and federal level to gain ongoing viability
Moving Ahead…
21
MANAGEMENT
Interactive Discussion• Is regulation hurting the viability of the LTC
market? If so, what types of directional changes would you suggest?
• Should there be a morbidity standard for LTC?
• How do we develop a mechanism to evaluate current regulations/rules in today’s market?
22
MANAGEMENT
Interactive Discussion• What is the biggest threat to the LTC
private market?
• Do all regulations have to be applied consistently?
• What is the impact of changing the rules mid-stream?
• What is the impact from morbidity improvements?
23
MANAGEMENT
What Are Your Questions?