How did we get here with long-term care rates?
When long-term care products were initially developed in the 1970s, insurers did not have the experience from similar products from which to make assumptions when developing the rates for these plans. Insurers have since learned that some of their assumptions, such as policy lapse rates and investment yields, were not correct. The discovery of these issues prompted changes to long-term care rate regulation. In 2006, Oregon adopted rate stabilization regulations that apply to coverage issued after the adoption of the regulations.
Largely, the pre-rate stabilization books of business are hugely unprofitable and insurers are generally seeing that their policyholders are not lapsing at the rate they expected. Inflation and interest rates were much lower than they had expected creating a number of the issues we are grappling with today. The post-rate stability blocks of business are also not performing well, though typically not to the extent of the pre-rate stability blocks.
Although, there are some differences among the carriers, all of them project significant lifetime loss ratios that it would be nearly impossible to increase their rates to a point that they would actually break even.
Lapses are becoming even less frequent than before while the length of stay for claims is increasing, so the situation for insurers is getting worse.
Long-term care rate review process
Once a company files a request with the division, the division's actuary, a mathematics expert in insurance, considers a variety of factors:
- How much does the company expect to pay out in benefits – compared to what it will generate in premiums and investment income over the life of the plan. This is referred to as a lifetime loss ratio. In other words, looking at the life of the policy, is the company bringing in enough money to pay likely claims without collecting excessive amounts from policyholders?
- How many people are likely to drop (lapse) their policies before they make significant claims? Some companies sought or are seeking significant rate increases because they predicted years ago that far more people would drop policies than actually did. This results in more claims than expected.
- Will a plan have enough Oregon policyholders to accurately set premiums based on Oregonians' claims or will Oregon members be part of a national pool?
- How will an "average" rate increase affect different policyholders since not everyone sees the same increase? In other words, how much of the increase will be shouldered by an 85-year-old compared to a 58-year-old?
- For policies issued before March 1, 2006, have companies complied with a requirement to offer consumers options if they seek a rate increase greater than 40 percent during any three-year period? Options include the right to trade reduced benefits for lower premiums.
- If a company seeks a rate increase, is at least 85 percent of the additional premium going to pay benefits versus administration and profit?