MANAGEMENTMANAGEMENT REGULATORY REFORM FOR LTCI VIABILITY Session 22: February 27, 2006 Session Producer: Sharon Reed, Asst Vice President Strategic Operations Penn Treaty Network America

MANAGEMENTMANAGEMENT Regulatory Reform for LTC Viability John Hartnedy Former Arkansas Deputy Commissioner Mark Litow Milliman Cameron Waite Penn Treaty Network America

MANAGEMENTMANAGEMENT 3 Session Format This interactive session will provide opportunity for questions and discussion after introductory comments from the panelists.

MANAGEMENTMANAGEMENT 4 Introduction What’s Changing? Who’s Changing It? Actuarial Influence on Public Policy Updates beyond Washington

MANAGEMENTMANAGEMENT John Hartnedy Former Arkansas Deputy Commissioner

MANAGEMENTMANAGEMENT 6 Overregulation Federal Government State Government Hinders product development Creates excessive work Limits rate competition Limits capital

MANAGEMENTMANAGEMENT 7 Disclosure IMSA- an example of an overall approach Industry association needs to police itself and publish results Industry is not creative enough!

MANAGEMENTMANAGEMENT 8 Reserves Formulaic covers about 80% of companies Fair market value and Enterprise Risk Management are coming… Independent actuaries need to certify results.

MANAGEMENTMANAGEMENT Mark E. Litow, F.S.A. Milliman Consultants and Actuaries

MANAGEMENTMANAGEMENT 10 Results of Current Reserving Requirements Strong tendency for increasing Statutory and GAAP margins due to Persistency/Morbidity/Interest Direction / recent RBC exception High Increase in artificial margins and back load income / Statutory and GAAP Results –Break even period increases –Cost of capital high (including risk based capital formula mismatch) –High taxes –Companies’ financial situation harmed / premiums increase –Companies more reluctant to enter/stay in business

MANAGEMENTMANAGEMENT 11 LTC Statutory Contract Reserves Mortality: –1994 Group Annuitant Mortality Table (GAM) for Policies Issued in 2005 and later Sample Cell (Age 65) ScenarioIRRPremium Base:1983 GAM15.0%$2, GAM13.15%$2, GAM15.0%$3,000

MANAGEMENTMANAGEMENT 12 LTC Statutory Contract Reserves Lapse Prior to and Later For policy years 1-4, the lesser of 80% of the voluntary lapse rate used in the calculation of gross premiums and 8% For policy year 1, the lesser of 80% of the voluntary lapse rate used in the calculation of gross premiums and 6% For policy years 5+, the lesser of 100% of the voluntary lapse rate used in the calculation of gross premiums and 4% For policy years 2-4, the lesser of 80% of the voluntary lapse rate used in the calculation of gross premiums and 4% For policy years 5+, the lesser of 100% of the voluntary lapse rate used in the calculation of gross premiums and 2%, except for group insurance as defined in [Section 4E(1) of the NAIC LTC Insurance Model Act] where the 2% shall be 3%.

MANAGEMENTMANAGEMENT 13 LTC Statutory Contract Reserves Lapse Sample Cell – Age 65 Priced for Lapse 9%, 7%, 5%, 3%, 2%, 1.5% IRRPremium Prior to %$3, and Later15%$3,000 Sample Cell – Age 65 Priced for Lapse 9%, 7%, 5%, 3%, 3% Prior to and Later IRRPremium Prior to %$2, and Later12.8%$2, and Later15.0%$2,750

MANAGEMENTMANAGEMENT 14 LTC Statutory Contract Reserves Interest: –NAIC Model “… Maximum rate permitted by law in valuation of whole life insurance …” –4% in 2006 Sample Cell (Age 65) ScenarioIRRPremium Base:4.5% Valuation Rate15.0%$3, % Valuation Rate13.3%$3, % Valuation Rate15.0%$3,100

MANAGEMENTMANAGEMENT 15 LTC Statutory Contract Reserves Method: –1 Year Preliminary Term (since 1/1/92) Morbidity: –“Valued using tables established for reserve purposes by a qualified actuary and acceptable to the commissioner.” –“In determining the morbidity assumptions, the actuary shall use assumptions that represent the best estimate of anticipated future experience, but shall not incorporate any expectation of future morbidity improvement.”

MANAGEMENTMANAGEMENT 16 LTC Risk Based Capital Current: 25% of first $50 million earned premium 15% of earned premium in excess of $50 million 5% of claim reserves New: 10% of first $50 million earned premium + 3% of earned premiums in excess of $50 million + 25% times first $35 million in incurred claims + 8% times incurred claims in excess of $35 million + 5% of unpaid claims reserves + 10% non-can additional charge

MANAGEMENTMANAGEMENT 17 LTC Risk Based Capital New Pricing (Sample Cell) IRRPremium Current RBC15.0%$3,000 New RBC18.5%$3,000 New RBC15.0%$2,910

MANAGEMENTMANAGEMENT Cameron Waite Penn Treaty Network America

MANAGEMENTMANAGEMENT 19 Industry and Regulators Industry –Rate Increases –Expanded agent commissions –Closed blocks –Company exits from business line Regulators –Consumer protection –Monitoring reserves –Surplus adequacy –Future rate stability

MANAGEMENTMANAGEMENT 20 Balancing Consumer Advocacy and Industry Viability Regulators role/ Industry role Legislation and Regulation at the state and federal level to gain ongoing viability Moving Ahead…

MANAGEMENTMANAGEMENT 21 Interactive Discussion Is regulation hurting the viability of the LTC market? If so, what types of directional changes would you suggest? Should there be a morbidity standard for LTC? How do we develop a mechanism to evaluate current regulations/rules in today’s market?

MANAGEMENTMANAGEMENT 22 Interactive Discussion What is the biggest threat to the LTC private market? Do all regulations have to be applied consistently? What is the impact of changing the rules mid-stream? What is the impact from morbidity improvements?

MANAGEMENTMANAGEMENT 23 What Are Your Questions?