New standalone long-term care insurance contracts issued today have a much lower chance of facing big rate hikes than policies issued in the past, a new survey of actuarial experts has found.
Changes in regulations, lapse rates and investment return assumptions on new products are reflected in pricing to a much better degree than with the previous generation of LTCi policies, said Jesse Slome, executive director of the American Association for Long-Term Care Insurance.
“Most actuaries responding see little or no risk of needing future rate increases on recently priced policies,” Slome said.
The survey found that 79 percent of the nearly 80 actuaries polled said the risk of a price hike was 10 percent or less, Slome said.
Another 12.5 percent of respondents said there was a likelihood of future rate increases of 20 percent, the AALTCI survey found.
Results are in line with a 2016 long-term care pricing study by the Society of Actuaries, said Joe Wurzburger, a fellow at the SOA.
“Between that [SOA] study and what I hear from pricing actuaries, the new LTCi products are now much less likely to go up, and if we needed an increase it would be closer to 10 percent,” Wurzburger said.
There are about 7 million standalone LTCi policies in the market, and that market is expected to grow by only about 60,000 new policies this year.
Lapse Rates and Investment Returns
Older LTCi products were priced too low, but insurers only realized that much later when people held on to their generous policies.
When insurers discovered they were on the hook to pay for expensive claims, and that low interest rates only exacerbated the dilemma, insurers raised prices sometimes by as much as 25 percent to 100 percent in a single year.
New pricing incorporates past experience that people are highly likely to hold onto their LTCi contracts.
The average lapse rate in the 2014 pricing year was 0.7 percent, or nearly zero, while the lapse rate during the 2000 pricing year was 2.8 percent, according to the SOA.
Investment income assumptions also have been lowered, with industry averages set at 4.6 percent in the 2014 pricing year. This is down from 6.4 percent in the 2000 pricing year, the SOA study found.
“On a product like LTCi, that’s a pretty significant impact,” Wurzburger said.
LTCi contracts are difficult to price because claims are filed years, often decades, after the policy has been issued. In addition, small changes in rate assumptions make a big difference over the long periods during which the contract is in force.
Unlike term life insurance policy with a fixed benefit, insurers don’t know how much they will ultimately pay out on LTCi contracts.
Reserving Right To Raise Price
But while actuaries insist that newer LTCi products are more accurately priced today than they were 20 years ago, insurers issuing new LTCi contracts still retain the right to raise prices.
New York Life’s innovative My Care LTCi contract, which does away with elimination periods but shares the risk with the policyholder through a coinsurance arrangement, guarantees that the price will not rise for three years.
But after the third year, all bets are off and the company reserves the right to raise the price of a My Care contract, the company said.
If interest rates drop and the investment portfolio yield falls, or the company is faced with some other form of “adverse experience,” New York Life has a cushion to help absorb those changes and can always raise prices if it wants to.
But if interest rates go up, as they are doing now, the company can use a dividend feature to help reduce a policyholder’s premium, the company said.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]
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