Impact of lower lapses on Cost of Claims for long-term
Care Policy Issued to a 55-Year-old
1600
expected cost of claims (adjusted for
survivorship) in each policy duration in
1400
1200
1000
800
600
400
200
0
1
Expected claims using
statutory prescribed
mortality table (1994
US GAM) and statutory
prescribed minimum lapse
rates
Sensitivity: Expected claims
using statutory prescribed
mortality table (1994
US GAM) and statutory
prescribed minimum lapse
rates less 1 percent
source: society of actuaries long-term Care Committee 1984–2004 Intercompany
experience study for long-term Care Insureds
6 11 16 21 26
Policy duration
31 36 41 46 51
■ ■ The difficulty of incorporating flexible premiums in the current product
design;
■ ■ The lack of incentives for policyholders to prefund premiums when using
attained-age cost of insurance rates
because of the lack of a cash value.
In addition to addressing consumer
concerns, the cash value on LTC poli-
cies might help private LTC insurance
writers mitigate some of the long-term
risks associated with these policies. Since
cash values on the policies could be con-
sidered as an investment, policyholders
might be encouraged to conserve ben-
efits, which could help insurers control
costs associated with claims. Allowing
cash values also might help insurers
transfer some of the risk associated with
interest rates and investments to poli-
cyholders. Spread-based cash value
policies, because of more investment in-
come from the spread between earned
and credited rates on cash values, could
reduce insurers’ termination risk from
lower-than-expected voluntary termi-
nations of policies. The cash value on a
flexible premium LTC insurance policy
priced with attained-age rating could
build up quickly because the cost of
insurance would be low at younger at-
tained ages. This could reduce the net
amount at risk as the insured ages, and
because the policyholders would not
need the insurance anymore, this might
minimize risk due to antiselection in
lapses at high durations. Figure 2 shows
the lapse risk associated with current
LTC insurance products.
Revamping the LTC Insurance
Market
Since LTC insurance policies were first
designed and marketed 35 years ago, the
basic product has remained the same. So
have the primary concerns of people considering purchasing LTC insurance:
■ ■ Is it affordable?
■ ■ Is it flexible?
■ ■ Is it liquid?
■ ■ Is it necessary?
Insurance companies have tried to
address these questions over time by
adding features to their policies but have
not been able to address them completely. As a result, the market for private LTC
insurance is a narrow one that caters only
to specific segments of the population.
In the mid to late 2000s, many insur-
ers pulled out of the LTC market entirely
because of underpricing and an inability
to manage the long-term risks associ-
ated with LTC insurance. The situation
has been aggravated by massive rate in-
creases that carriers are requesting on
mispriced in-force policies. As a conse-
quence, the sale of private LTC insurance
policies continues to drop.
SIVAKUMAR DESAI is a fellow of the
society of actuaries and a member of
the academy. He can be reached at desai.
sivakumar@gmail.com.
Resources
Oxford Analytica, “How Will Boomers Pay for
Long-Term Care?” July 2007.
http://www.forbes.com/2007/07/19/longterm-
health-care-biz-cx_0720oxford.html
“Who Buys Long Term Care Insurance in
2010-2011? A 20-Year Study of Buyers and
Nonbuyers (in the Individual Market),”
LifePlans, Inc./America’s Health Insurance
Plans, 2012.
This article is solely the opinion of its author.
It does not express the official policy of the
American Academy of Actuaries; nor does it
necessarily reflect the opinions of the Academy’s
individual officers, members, or staff.
48 CONTINGENCIES JAN | FEB. 13
