LTC Bullet: AARP Harping Misses Mark on LTCi Rate Stability

Wednesday, May 19, 2004


LTC Comment: This "reality check" Bullet corrects errors and bad advice in a recent AARP Bulletin regarding long-term care insurance rate stability. The whole story after the ***news.***

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LTC Comment: Today's LTC Bullet is the latest in our "reality check" series. When the national media get key facts or interpretations wrong about long-term care issues, we try to set the record straight. (Read the first 64 reality-check Bullets at - reality_ck ).

Eileen J. Tell, Senior Vice President of Long Term Care Group Inc., has authored many of these come-uppances to careless media reports. She has another story to tell today. We hope her comments are helpful to LTCi agents around the country who struggle to get the facts straight about rate stability for their clients. But we especially hope the media will take note and purvey more accurate information on this subject in the future.

You can read the article Ms. Tell takes to task in this Bullet, titled "Big Premium Hikes Jolt Owners of Long-Term Care Insurance," at . It was written by Bill Hogan and Trish Nicholson and published in the April 2004 of the AARP Bulletin.


"AARP Bulletin Rate Hike Story Deficient on Several Counts"
Eileen J. Tell

A central issue of concern for both long term care (LTC) insurers and consumers is the stability of premium rates. While the issue is a critically important one, the April 2004 AARP Bulletin does not approach it fairly or accurately. Although this issue touches many insurers and consumers, only two insurance companies are singled out for mention. To mention only these two companies gives an incomplete picture of an industry actively pursuing policies to deal with this critical issue. Other insurers than those mentioned have had rate increases and many other insurers have never had a rate increase.

While premiums are designed to remain level over the lifetime of the policy, the insurance company does have a limited right to increase premiums on a "class" basis, if actuarially justified based on the claims experience of an entire group of insureds. No individual can be singled out for a premium increase based on age, health, or their use of benefits. States require insurers to file a request for rate increase which is reviewed to ensure that it is actuarially justified before the rate increase action is approved.

The fact that rates can be changed is not, as suggested in the AARP Bulletin, "buried in the fine print." Most policies state their limited right to change premiums on the face page of the policy (sometimes in extra-large print). Typically, the insurer also refers the policyholder to read more about this right to change premiums in the section of the policy that talks about premiums and renewals. So there are at least two places in the policy where this information is disclosed, including the very prominent placement on the face page. Most companies include this information in their marketing materials also.

Do all consumers read their policies? Probably not. Should they? Absolutely! Do all agents point out to prospective buyers that rates can increase and encourage them to plan ahead for affordability both today and in the event of a rate increase? While today many agents probably do address this important issue, perhaps in the context of the discussion of suitability of purchase which is required in many states, there probably have been and will continue to be agents who don't do a good job by the consumer in this regard.

Why have there been rate increases? It is not, as suggested by Benjamin Lipson, because insurers "grossly underestimated their ability to get pools of policyholders large enough to spread the risk." [Read the LTC Bullets review of Lipson's book "J.K. Lasser's Choosing the Right Long-Term Care Insurance" at .] Nor is it because they "grossly underestimate the fact that nursing home costs have been rising so rapidly." In fact, neither of those factors is important in driving the need for premium increases, nor is it true that insurers grossly underestimated nursing home cost increases. Inflation in the nursing home segment has remained fairly stable at around 5% to 7% per year. And while the rate of increase in nursing home costs is important to consumers to ensure that their coverage maintains its value over time, it is irrelevant to the issue of whether or not a rate increase is needed, from the insurer's perspective.

The article quotes the Kansas Insurance Commissioner saying that "only three of the top 10 companies did not have fairly significant rate increases." Maybe that is true in Kansas, but nationally, among the top 10 companies (based on the most recently available LIMRA data on policies in force), only 5 have had rate increases for existing policyholders on their original blocks of business. And three of those five are no longer selling LTC. One of those 5 which had a rate increase, had only a 15% rate increase on their very first generation policy form sold from 1985-1987.

Most insured blocks of LTCi business have never had a rate increase. Rate increases among the top eight insurers (representing about 80% of covered lives) have been modest and infrequent.1 Some of the earliest experiences with rate increases may have emerged as a result of poor underwriting practices or deliberate under-pricing to gain market share. Carriers today understand the importance of careful underwriting to ensure rate stability and, therefore, they invest in the time and technology to do this. Experience studies over time suggest that insurers, for the most part, are pricing correctly with respect to mortality and morbidity experience. In fact, claims experience, for many insurers which have invested in the time and technology to underwrite correctly, has been better than expected overall.

More recently, however, there has been concern with insurers' assumptions about policy lapse rates and interest rates. Premium increases could be necessary if insurers' assumptions are wrong about the number of people who will keep or drop their policies over time or about earnings on reserves. Even small differences between actual and expected rates on these critical assumptions are important. With the current down-turn in the economy and lower interest rates, these concerns are even more important.

To address these important concerns, the National Association of Insurance Commissioners (NAIC) has adopted model "rate stability" guidelines which:
-- require insurers to disclose to prospective buyers any prior rate increases they have made;
-- make it more difficult for insurers to obtain a rate increase, including imposing fines and penalties, as a means of encouraging more conservative assumptions for initial pricing; and
-- require insurers to certify that their premiums will be adequate under "moderately adverse" circumstances.

So far, 21 states have adopted these or similar provisions to their long term care insurance regulations. Many insurers follow the rate stability guidelines in all states, even those that have not yet required them to do so. While the consumer may see the newest generation of long term care products with somewhat higher premiums than previous products had, these measures are designed to give them more confidence in the rate stability behind those premiums.

Finally, I'd like to take issue with the quote from Consumers Reports which is included in the article, but which is not verified with factual information. Today's LTC policies are not "packed with catches that can keep you from collecting" benefits. Today's policies use objective and reliable measures of when someone needs long term care that derive from the gerontology field - they are not an insurance industry construct designed to prevent benefits from being used. While some of the policies of two decades ago had inappropriate and artificial "gate-keepers" to benefits, today's policies do not. It's time for Consumer Reports to update its information and understanding on how long term care insurance really works.

Once again, instead of scaring consumers into non-action with anecdotal evidence or misleading information, we'd love to see the media helping people learn how to protect themselves against the financial catastrophe of needing long term care and helping them understand how to make wise purchase decisions. There are many satisfied customers among the 6 million or so policyholders who have long term care coverage. Many of us in the industry talk with them every day. We hear their stories of how LTCi coverage has made a difference to the quality of their lives, and to their financial and emotional independence. Both the problems of the industry and its triumphs are and should be newsworthy. They should be covered objectively and accurately in the media.

1 "Changes in Long-Term Care Industry No Cause For Alarm." Kiplinger's Retirement Report. June 2000.