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.
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.
This Kiplinger article offers several issues that long-term care (LTC) buyers should consider to purchase a cost-effective policy. The article quotes Milliman’s Dawn Helwig discussing the benefit of purchasing a policy with reduced coverage periods.
Here’s an excerpt:
Once you’ve considered the type of risk you’d like to cover, ask yourself, “how much of that risk can you transfer to the insurance company, and how much can you tolerate on your own?” [Bonnie] Burns says. The first step is to choose a deductible, also known as the “elimination period,” which is the number of days between the time you become eligible for benefits and the time the insurer starts paying.
Many policies offer a 90-day elimination period, but prepare to spend $22,500 out of pocket for nursing-home care until benefits kick in. The longer your elimination period, the lower your premium will be. A 90-day elimination period costs about 40% less than a zero-day deductible, says James Glickman, president of LifeCare Assurance, a long-term-care reinsurer in Woodland Hills, Cal.
Choosing a shorter benefit period will also cut your cost. A benefit period of three to five years “will cover the vast majority” of long-term-care needs, says Dawn Helwig, a principal at actuarial and consulting firm Milliman. Consumers “shouldn’t feel like they have to buy the Cadillac policy,” she says.
Many long-term care (LTC) insurers are seeking premium rate increases that are due to financial challenges. In the latest issue of Contingencies, Milliman’s Dawn Helwig examines three key assumptions—morbidity, lapse/mortality rates, and interest rates—affecting LTC rates. She also discusses the need for regulatory action “to make the rate increase landscape more predictable” and efficient.
Here is an excerpt:
It’s necessary to find a balanced solution for approving rates that will provide stability in coverage for insureds. Such a solution will preserve the private LTC market and prevent future reliance solely on public programs like Medicaid. In order to achieve this balance, more coordination is needed between regulators and companies in early filing and approval of actuarially justified rate increases. Closed blocks of business must be able to be restored to adequacy to promote long-term stability.
Some possible solutions that have been mentioned include:
• Allowing more policyholder options at rate increase times (benefit reductions).
• Improving communication with policyholders about their options and (if approved) future planned rate increases.
• Requiring companies to annually review their business and to certify whether or not rates need to be increased.
• Allowing rate increases based on updated assumptions that are actuarially supported, regardless of whether the existing block of business has developed enough experience to be considered credible (i.e., regardless of whether the updated assumptions can be demonstrated in the company’s actual experience).
• Requiring companies to file their future plans as part of a rate increase, including what will happen favorably or unfavorably from what was assumed in this filing.
• Allowing increases to be spread out over multiple years. This may require modifying the rate stability requirement that makes an actuary file the full increase needed in order to certify that rates are adequate using moderately adverse requirements.
To read the entire article, click here.