This article by Milliman actuaries is the fourth in a series on long-term care (LTC) first principles modeling. The first article in the series, released in March 2016, introduced the topic and set the stage for the series of case study discussions that would follow. The second and third articles in the series, released in June 2016 and November 2016, examined the development of mortality and lapse assumptions, respectively, for use in an LTC first principles model. The latest article builds on these discussions with a look into how a first principles model, using these assumptions, can enhance and simplify the modeling of LTC projections. Once the groundwork of developing the key assumptions is completed, first principles models provide an improved platform for modeling by automating many processes and making refinements both easier to implement and more varied.
In this article, Milliman consultants discuss issues related to developing healthy life lapse rates using a long-term care (LTC) first principles model. As noted throughout the article, the common assumption that the ultimate total life lapse rate reaches a constant level produces an increasing healthy life lapse rate by duration. Alternatively, if the healthy life lapse rate remains constant once it reaches an ultimate level, that would imply that the total life lapse rate continues to decrease over time. The article also examines how mortality and lapse assumptions interact and the importance that developing an appropriate mortality assumption can have on setting lapse rate assumptions.
Milliman consultants Al Schmitz, Daniel Nitz, Tim Kempen have published a long-term care (LTC) insurance valuation survey. The survey reviews and documents the assumptions and methodologies related to the determination and testing of active life and disabled life reserves as well as the asset strategies and investments backing the reserves.
To download the research report, click here.
The development of separate mortality assumptions for healthy and disabled lives creates challenges for insurers using a long-term care (LTC) first principles model. In this article, Milliman actuaries discuss those challenges as well as their experience working with companies to overcome them. They also explore the advantages and opportunities of an enhanced approach to modeling mortality in a first principles context.
The Federal Reserve’s interest rate hike may result in lower long-term care (LTC) premiums, making such coverage more appealing to seniors. Milliman consultant Al Schmitz offers some perspective in this Reuters article.
Even if seniors are able to sock money away in CDs or money market funds with slightly better yield, inflation will take its toll. “If you are earning 1 percent and inflation is 1.5 percent, that’s no different than earning 1.5 percent if inflation is 2 percent,” notes Greg McBride, chief financial analyst for Bankrate.com.
On the other hand, significantly higher interest rates over the next year also could make long-term care insurance and some types of annuities more attractive, since insurance companies look to bond market returns as a key element of pricing.
Long-term care policy premiums have spiked dramatically in recent years, due in part to the near-zero interest rate environment. A 1 percentage point rise in long-term interest rates generally translates into a decline in policy premiums of about 10 percent, according to Al Schmitz, a principal and consulting actuary at Milliman, a consulting firm that works with insurers.
For more Milliman perspective on LTC insurance, click here.
We blogged last week about a Congressional committee’s hearing on the CLASS Act. In his testimony, Al Schmitz put forward several ideas for ensuring the solvency of the new federal long-term care (LTC) program:
On behalf of the Academy, I offer the following recommendations for modifying the CLASS program:
- An actively-at-work definition with a minimum requirement of 20 to 30 hours of scheduled work or a comparable requirement;
- Restrictions on the ability to opt out and subsequently opt in with the use of either a long second waiting period for benefits or an alternative underwriting mechanism(s);
- The use of a benefit elimination period or duration limits;
- Benefits that are paid on a reimbursement rather than cash basis;
- An initial premium structure that provides for scheduled premium increases for active enrollees at either a consumer price index or alternative rate.
These modifications, along with an effective marketing effort, will improve the sustainability of this voluntary long-term care program. Without these modifications, the program is likely to be unsustainable.
For more on some of these solutions, check out this post and the related articles.