1. LTC Financing in the US Jim Glickman, FSA, MAAA
President, Society of Actuaries
November 8, 2018

2. Funding of US LTC expenses
US spending on LTC was $246 billion in 2015
63% was funded by two social programs:
Medicare: Limited post-acute care
Medicaid: Once assets are spent down
20% from direct out of pocket spending
Most represents asset spend-down
Only 3% from private LTC insurance
7 million insureds out of 86 million age 55+
Source: National Health Expenditure (NHE) Amounts by Type of Expenditure and Source of Funds: Calendar Years ,
Centers for Medicare & Medicaid Services

3. Overview of available insurance products

4. Spectrum of LTC and Hybrid Products
101g Products – Acceleration and Chronic Illness
7702b Product – LTC Rider
7702b Product – Extension of Benefits (EOB) Coverage
Standalone LTCi with Return of Premium on Death
Standalone LTCi
Annuity with LTC Rider

5. Estimated LTCi Premium by Product (and exposure to LTCi Risk)
Single Pay
Single Pay Policies
Recurring Pay
Recurring Policies
Equiv Recur Premium
Total Policies
% LTC Cost
% Sales by Policies
Equiv Recur LTC Prem
LTC Annuity
$ MM
5,000 -
$ MM 5% 1%
$ MM
101g*
$ MM
10,232
$ MM
83,922
$ MM
94,154 3%
28%
$ 15 MM
LTC Rider*
$ MM
3,075
$ MM
106,540
$ MM
109,615 7%
32%
$ 27 MM
EOB*
$1,175 MM
14,834
$ MM
10,637
$ MM
25,471
27% 8%
$ 52 MM
Standalone*
$ MM
104,332
100%
31%
$ 261 MM
*Source: 2015 Year End LIMRA Surveys on LTCi Standalone and Combo LTC

6. LTCi Background

7. Long-term Care Insurance 101
Relatively new product born in late 1980s
Patterned after disability income plans
Most have a defined benefit trigger: requires assistance with 2 out of 6 activities of daily living (“ADLs”) or requires supervision due to a severe cognitive impairment
Once trigger is met: qualified services are covered up to a daily maximum benefit
Usually care received in a nursing home, assisted living facility or by a qualified home health care professional
Some plans do not require expenses to be incurred
Specified benefit and elimination periods
Inflation protection option: e.g., daily benefit increases 5% each year
Issue age rated: premiums are intended to be level for life
Guaranteed renewable: insurer cannot cancel as long as required premiums are paid
Premium increases are by class and must be approved by regulators
Slide reproduced with permission from Vince Bodnar

8. LTC History: A Timeline
1970s: Emergence of Nursing Home Care
1980: Standalone Policies / Custodial Care
1989 to 1992: NAIC Standards / Home Health Care
: Clinton Health Care / Pool of Money
: HIPAA Legislation Standardizes LTCi
: Rate Stabilization Paradigm Shift
2007-Present: Inforce Rates Increased Industrywide

9. Level Premium Pre-funds an Increasing Cost
Four forces contribute to increasing claim costs:
Older people more likely to need long-term care
Wear-off of underwriting effect
Benefits increase for policies with inflation protection
Married people becoming widows and widowers (which have higher costs)
Slide reproduced with permission from Vince Bodnar with some modifications

10. Cash Flow Pattern
Level premium rates and increasing claims costs results in a cash flow mismatch
Companies must hold an active life reserve that builds and releases over time
Reserves Build
Reserves Release
Slide reproduced with permission from Vince Bodnar

11. Challenges with LTCi Regulatory Uncertainty Assumptions
Political, not actuarial
Assumptions
Interest rates (8% became 3%)
Lapse rates (5% became 1%)
Longevity (5 to 10 year increase)
Marketplace
Carrier exits (100+ to about 10)
Distribution (45k became 2k)
Consumer perceptions (smart buy became risky buy)
Care Delivery
Emergence of Assisted Living Facilities (ALFs)
Slide reproduced with permission from Vince Bodnar with some modifications

12. Losses Become Difficult to Overcome
LTC premium base decreases while claim costs increase
Rate increases needed to offset deviations grow dramatically over time
Regulators resist large rate increases (>25%); require benefit reduction options
Often impossible to offset losses completely, resulting in reserve corrections
Cash Flows By Year Since Product Launch
Rate Increase Required to Offset Future Losses
Deviation
Yr. 5
Yr. 10
Yr. 15
Yr. 20
+10% Claims 7%
11%
18%
27%
-1% Lapse
10%
16%
24%
34%
-1% Interest 8%
14%
20%
All Three
28%
44%
64%
92%
Slide reproduced with permission from Vince Bodnar

13. SOA Pricing Study Research questions:
On new issues of LTCi policies, what is the probability of a rate increase?
What does that question even mean?
Six companies participated with these characteristics:
Currently issuing new policies
In market since before 2000
Provided pricing assumptions for a portfolio of benefits and issue ages for three issue dates (2000, 2007, 2014)
Assumptions provided included: Claim costs, Lapse rates, Investment yields, Mortality rates, Risk margins
Provided basis for assumptions (source, amount of supporting data)
Assumptions averaged by SOA into “Illustrative Market Assumptions”
Best-estimate net premiums were then calculated using the assumptions

14. Summary
Issue Year
Prob Rate Increase
Average
Projected Increase
2000
40%
34%
2007
30%
18%
2014
10%
Based on:
Best-estimate of parameter risk at time of issue (no hindsight)
Rock-bottom lapse assumptions
Higher Margins

15. Discussion

16. SOA LTC Activity

17. SOA Long-Term Care Insurance Section
Newsletter, webcasts, podcasts, sessions at meetings
LTC Pricing Project
LTC Think Tank
Regulatory Forums

18. LTC Activities at the SOA
SOA LTC Pricing Study
Intercompany Experience Study
Morbidity Improvement Research
Long-Term Care News
LTC Think Tank
LTC InsurTech
Webcasts / Podcasts
LTC Regulatory Resource

19. Morbidity Improvement Research
Understand historical morbidity improvement
Estimate of future morbidity improvement
Regulator dialogue during asset adequacy analysis
Address secular improvement and other drivers
Underwriting
Contract definitions
Benefit triggers, etc.