1LTCI insurers formerly used a loss ratio minimum of 60%-65%. After the NAIC 2000 Model Act and Regulation, states insisted on more conservative pricing, including rate
stabilization provisions, raising costs.
2 The FLTCIP was established by an act of Congress, the “Long Term Care Security Act of 2000” (PL 106-625) and is the only private LTCI program not regulated by the states,
being governed instead by regulations issued by the U.S. Office of Personnel Management (OPM), which are promulgated through the Federal Register. The FLTCIP remains
the largest LTCI program in the country, with more than 272,000 persons covered and generating more than $430 million in annualized premium in FY2014.
Financial crisis, low
interest rates, inflation
Major carrier exits due to poor UW results, investor qualms
enacted under ACA
2008 2009 2010 2011 2012 2013 2014
16 remaining insurers
selling stand-alone LTCI;
172,000 new lives;
$484 million in sales
Insurance Program (FLTCIP). The FLTCIP became the largest
LTCI program in the country, stimulating premium growth and
setting new benchmarks for service.
Individual policies were sold on a commission basis, first by
career agents, general agents, and other producers, and later
by banks and wirehouses. Early group plans, marketed to the
Fortune 100 companies, were usually designed and competed
by actuarial firms like Towers Perrin, Hewitt, and William Mercer on a fee basis. As the largest employer groups got scooped,
insurers began to move downmarket to the many thousands of
smaller employers without LTCI plans, thus preparing the way
for brokerage, which based its services on commissions.
Pricing was a challenge from the start. Because no privately
insured data were available on which to base actuarial assumptions about lapse, mortality, morbidity, and other risk factors,
actuaries doing initial pricing had to rely on the National Nursing Home Survey of the mid-1980s, which furnished general
population data as opposed to insured population utilization
3 or to extrapolate data from related business lines like
health and disability.
There was also the matter of interest rates. LTCI liability
cash flows (usually projected to last more than five decades) are
long-dated, while asset cash flows (usually based on fixed in-
come) are not. This is because they are typically unavailable for
such durations. But equities and other market-based securities
can introduce volatility. Cash, of course, is not an option, except
in the smallest amounts, as it is subject to inflation.
As insurance experience began to emerge in the late 1990s,
actuaries found that a number of their assumptions were optimistic. This realization led to some early moves at re-rating.
Regulators were caught unprepared, many being unfamiliar
with how the new product worked. According to Jim Glickman, co-founder and CEO of LifeCare Assurance Company,
regulators themselves brought on the crisis in LTCI pricing they
wished to avoid, first by adopting minimum loss ratios, which
required insurers to spend a minimum level of premium revenue on claims, spurring them to set rates as low as possible to
avoid the possibility that the percentage of LTCI revenues paid
out in claims might be too low, then by reversing themselves
by adopting a model4 that penalized insurers that raised rates,
which caused them to set initial rates as high as possible to avoid
the risk of having to increase rates.
For Glickman, this second wave of regulations precipitated
numerous decisions, including changes to underwriting, higher
business pricing, and carrier exits.
Certainly things began to look very different in the 2000s,
a mood that culminated in the financial crisis on Wall Street
in 2007-2008. Low interest rates made it hard for insurers to