As we envision it, variable LTCI plan design would follow that
of standard standalone comprehensive LTCI, with policyholders
choosing a maximum daily benefit (MDB), a maximum lifetime
benefit (MLB), and an appropriate means of adjusting for inflation.
With so many elements of the benefit, how would adjustments be
made in a variable policy? The simplest way would be to multiply
both the MDB and the MLB by the adjustment factor. However,
instead of this approach, some consumers might prefer a larger
reduction in the MLB and no reduction in the MDB.
Another possible approach would be for the MLB and MDB
to be adjusted in tandem, but with an optional rider that allows
the policyholder to exceed the MDB on a coinsurance basis—for
example, if he or she has the rider and pays 20 percent of the actual
charges out of pocket, the plan will pay the remaining 80 percent
of charges, even if that exceeds the MDB.
When building personal variable LTCI plans, buyers can be
encouraged to consider how many moving parts they are willing
to monitor, as well as their personal tolerance for deviations from
the target or expected levels/policy duration.
In sum, variable LTCI requires policyholders to pay more attention
to the plan’s performance as well as to factors affecting costs in the
health sector, such as longevity, and in the general economy, such
as interest rates. The upside is a design that generates better value
through the long term for those willing to do so.
Administering a variable product would likely involve additional
challenges. Certain values like MDBs or MLBs that are only affected
today by claims payments would now be subject to experience adjustments. Buy-ups or benefit reductions would become more complex,
as would periodic inflation adjustments. Policy benefits statements
would be harder to produce, and online or telephone self-service
functions would be necessary to avoid inundating the call centers
with routine questions. Of particular importance to work out would
be tracking the account values and the mechanics for how gains from
lapses and mortality would be credited to surviving policyholders.
In our view, actuaries would need to monitor morbidity and
offer a professional opinion on whether future COI charges would
be sufficient to pay claims and expenses. They would also need to
monitor whether the locked-in formulas to discount COI charges
and premiums were still applicable and were fair to policyholders
of different cohorts. The actuaries would then be responsible for
making any required adjustments.
As indicated above, a trigger would have to be devised for this
purpose. The easiest one to administer might be a test in which
the actuary forecasts the adjustment factor using current best-estimate assumptions. If the adjustment factor is forecast to fall below
a predefined threshold—say 90 percent—that would trigger an
adjustment. In such an instance, we suggest that the discounting
rates and COI rates be recalculated to produce a level or gradually
increasing forecast of the adjustment factor.
Whatever is decided, it would be important to determine a
standard process for accurately reporting changing account values.
Because conventional LTCI payouts are fixed, this change will require systems work. Some LTCI insurers have developed their own
proprietary systems; others have purchased off-the-shelf software;
still others have modified off-the-shelf software over time such that
it resembles the operations of no other insurer. In each case, new
requirements would necessitate software development lifecycle
efforts and extensive testing.
Moreover, the new, more-sophisticated variable LTCI products
would have to pass muster with state insurance departments. And
the trigger mechanism for adjustments to benefits would have to
be explained and approved. Hopefully, the process would be similar
to how rate increases are approved now because adjusting benefits
and premiums are corresponding and complementary actions.
The National Association of Insurance Commissioners Interstate
Compact, which has streamlined and expedited the approval process, could be of help.
There is, of course, the matter of compliance with current tax
law under the Health Insurance Portability and Accountability Act
of 1996 (HIPAA) and state income tax laws. One issue with variable
LTCI concerns the provision of guaranteed renewability, which is
required by HIPAA, Section 7702B (b)( 1)(C), for tax-preferred
treatment of LTCI premiums and benefits. The nature of a variable
lifetime benefit payout involves a different (although tighter) relation
between premium and benefit, which might raise questions about the
policy being renewable on identical terms. However, variable LTCI
stipulates a guaranteed floor below which the MLB cannot drop.
This floor constitutes a consistent, guaranteed renewable relation
between premium and benefit. The floor would not be subject to
change unless the policyholder elects to make such a change under
a conversion. It will be necessary to approach the U.S. Treasury for
a ruling on compliance of variable LTCI with current tax law. That
will take time and effort.
All of this might seem like a tall order, but it is relatively simple
when compared with the administrative requirements of most
investment products. And, variable LTCI would not at first involve
the selection of any securities by the individual policyholder. As
noted above, all investment decisions would be made at the group or
portfolio level by insurer managers. Finally, it must be remembered
that the administrative demands of variable LTCI would be offset
by the avoidance of the need to file for and implement frequent rate
increases and corresponding landing spot offers. As LTCI insurers
know, such efforts necessitate a huge amount of administrative work,
planning, and expense.
Most consumers are able to live with insurance premium increases.
They see increases in their health, homeowner’s, and other insurance
policies. They understand that the cost of services goes up, that
actual might exceed expected claims, and that insurers must make
adjustments. What is important to the consumer is that premium
adjustments be predictable, which has not been the case for many
private LTC insurance policyholders. Hopefully, prospective variable
LTCI buyers or converts from existing standalone policies can be