BILL ANALYSIS Ó
AB 999
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ASSEMBLY THIRD READING
AB 999 (Yamada)
As Amended May 11, 2011
Majority vote
INSURANCE 7-5 APPROPRIATIONS 11-6
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|Ayes:|Solorio, Carter, Feuer, |Ayes:|Fuentes, Blumenfield, |
| |Hayashi, Skinner, Torres, | |Bradford, Charles |
| |Wieckowski | |Calderon, Campos, Davis, |
| | | |Hall, Hill, Lara, |
| | | |Mitchell, Solorio |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Hagman, Charles Calderon, |Nays:|Harkey, Donnelly, Gatto, |
| |Grove, Miller, Olsen | |Nielsen, Norby, Wagner |
| | | | |
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SUMMARY : Modifies the long-term care (LTC) insurance rate
development process. Specifically, this bill :
1)Requires every LTC insurer to make available a specimen of
each individual or group policy form it sells.
2)Requires the Insurance Commissioner (IC) to post on the
Department of Insurance (DOI) Web site an outline of coverage
for each LTC policy in connection with the rate comparison
page already available on the Web site.
3)Provides that if the loss ratio calculated pursuant to
existing law produces a ratio that is less than the highest
lifetime expected loss ratio for that policy form in all
previous filings, then premiums must be reduced so that the
loss ratio is equal to or higher than the previously filed
highest loss ratio.
4)Prohibits reliance on asset investment yields as a
justification for rate increases, subject to limited
exceptions.
5)Requires that loss experience on an insurer's policy forms be
pooled for purposes of measuring loss ratios, as specified.
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6)Limits the approval of rate increases on pre-stabilization
policies to no more than once every five years.
7)Limits the approval of rate increases on post-stabilization
policies to no more than once every 10 years.
8)Provides that, notwithstanding any provision of law, the IC
may approve rate filings if an insurer demonstrates that the
rates are necessary to protect the financial condition of the
insurer, including avoidance of further reductions in capital
and surplus.
EXISTING LAW :
1)Regulates both the rates and marketing of LTC insurance.
2)Provides that, for pre-stabilization LTC policies, premiums
are deemed reasonable if there is an expected loss ratio of
60%, provided that this loss ratio increases to 70% for rate
increases filed on or after December 31, 2009.
3)Specifies the criteria that shall be used in evaluating
expected loss ratios.
4)Provides that no rate increase may be implemented without the
prior approval of the IC, based on specified actuarial
criteria.
5)Includes, among the specified actuarial criteria, that the
insurer's actuarial certification include a statement that the
premium rate schedule is sufficient to cover anticipated costs
under moderately adverse experience, and that the rates are
reasonably expected to be sustainable over the life of the
policy form with no future premium increases expected.
6)Requires the IC to post an LTC rate comparison page on the DOI
internet website.
FISCAL EFFECT : According to the Assembly Appropriations
Committee:
1)Minor and absorbable costs to the DOI.
2)Potential minor increased costs to Medi-Cal in the event that
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fewer people buy LTC insurance.
COMMENTS :
1)According to the author, this bill is intended to modify the
LTC insurance ratemaking process to protect consumers from the
excessive rate volatility that has characterized the LTC
insurance market. Despite the "rate-stabilization" efforts
enacted in 2000, and implemented in 2002 and 2003, insurers
have continued to underestimate the real cost of LTC
insurance, and consumers who purchase policies they expect to
pay premiums on for many years before needing the coverage
have faced unexpectedly large rate increases. The goal of
this bill is to have LTC rates more accurately reflect the
actual costs so that consumers will know what they are buying.
The author is concerned that too many consumers become locked
into high-priced policies that they purchased with the
expectation of lower premiums.
2)LTC insurance is a relatively new, albeit very important,
insurance product. As life expectancies have increased, a
growing number of people find the need to have late-in-life
LTC services, which can be very expensive. Thus, an insurance
product to help pay for these expenses has developed. But LTC
insurance is different in many ways from most other insurance
products. While it is possible that a catastrophic event will
result in LTC needs in the early years of a policy, the
general expectation is that a policyholder will pay premiums
for many years before ever needing to make a claim. The
incentive to pay premiums for many years before needing the
insurance is based on the pricing mechanism that rewards those
who purchase during their relatively younger, healthier years.
As people age, and begin to have health problems, they either
face extremely high premiums or do not qualify at all for this
type of insurance.
The nature of LTC insurance - the expectation that claims will
occur only years in the future - has made predicting what the
claim costs will be very difficult. It is widely accepted
that the insurance industry did a poor job prior to the early
2000's of predicting these costs. There are a number of
factors: increasing life expectancies; life extending
technology; poor assumptions on how many policies would lapse;
and, even basic predictions about what nursing home care would
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cost. The result was that people who bought LTC insurance
products based on an evaluation of what they could afford
found themselves faced with very sharp and repeated premium
increases as the industry began to see actual costs develop.
The industry and regulators in the late 1990's began to address
these problems by adopting new rate-making rules. These rules
have been termed "rate stabilization." Policies sold
pre-2002-03 are termed "pre-stabilization" policies, and
policies sold since then are termed "post-stabilization"
policies. According to the author and sponsor, the Department
of Insurance (DOI), the post-stabilization reforms have not
worked well, and the same issues that plagued the
pre-stabilization market continue to plague the
post-stabilization market. LTC insurers are not entirely in
agreement with this assessment, noting that most of the rate
increases in recent years have been for pre-stabilization
policies. Nonetheless, the LTC insurance industry has
acknowledged that some changes are needed.
3)This bill proposes to limit the frequency of rate increases to
once every five years for pre-stabilization policies, and once
every 10 years for post stabilization policies. The purpose
of this rule is to encourage LTC insurers to take care to
estimate their expected costs so that policies are not sold to
unsuspecting consumers at enticing but unrealistically low
prices. In this regard, proponents note that LTC insurers
selling post-stabilization policies are already required to
assume, and build into their rates, that moderately adverse
circumstances will prevail in relation to the actuarial
assumptions used to build the rates.
LTC insurers have objected to this rule, arguing that it is
unrealistic to preclude any rate increases for such a duration
due to the myriad uncertainties that can arise in that time
period. They also argue that, with the prior approval
requirement, the IC already has the tools to prevent
unrealistically low rates. In lieu of this rule, the LTC
insurers have proposed that each insurer have a choice between
a five-year limitation for both pre- and post-stabilization
policies, and complying with an annual actuarial certification
that shows rates are at an appropriate level, and requiring an
action plan in the event the actuarial analysis shows
problems.
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Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086
FN: 0000990