BILL ANALYSIS Ó
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
AB 999 (Yamada) Hearing Date: June 22, 2011
As Amended: June 9, 2011
Fiscal: Yes
Urgency: No
SUMMARY Would revise long-term care insurance oversight to
enhance consumer information, revise rate calculation
requirements, and restrict the timing of rate changes
DIGEST
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.
This bill
Modifies the long-term care (LTC) insurance rate development
process rate to:
AB 999 (Yamada), Page 2
1. Require the Insurance Commissioner's annual long-term
care insurance rate guide to include a specimen outline of
coverage for each product currently marketed by each
insurer listed in the rate guide.
2. Require every insurer of LTC in California to post on
its Internet Web site and give written notice when
soliciting insureds that specified plan-related documents
are available upon request. They are required to be
provided within 15 calendar days of receipt of a request.
3. Provide, as to LTC policies issued prior to the approval
of rate schedules under SB 898 of 2000 (Chapter 812,
Statutes of 2000) that:
a. For pre-SB 898 LTC policies issued before rate
approval procedures were in place , beginning with the
first rate application filed after January 1, 2012, no
more than one rate increase for any policy form shall
be approved in any five-year period.
b. Also provides as follows:
i. If the premiums in any rate
revision filing calculated under existing law
produce a lifetime expected loss ratio that is
less than the highest lifetime expected loss
ratio for this policy form in the initial filing
or that for requested premium rates in any filing
made after January 1, 2012, the insurer shall
reduce the premiums in the filing so that the
current lifetime expected loss ratio is equal to
or greater than the highest initially filed loss
ratio or that for requested premium rates filed
after January 1, 2012. In the determination of a
lifetime expected loss ratio, a margin may
reflect changes in the manner in which risks are
shared between the insurer and a block of
policies due to changes in this law effective
January 1, 2012, and that margin shall not be
increased unless the manner in which risks are
shared between the insurer and block of policies
is changed further by law or regulation. The
determination of the lifetime expected loss ratio
shall be based on the actual distribution of
policies in force at the time of the first filing
AB 999 (Yamada), Page 3
after January 1, 2012, and not any prior assumed
distribution.
ii. In evaluating the expected loss
ratio, due consideration shall be given to all
relevant factors, except that the factor of
"interest" as stated in current law is eliminated
and replaced by "the discount rate used in the
calculation of lifetime expected loss ratios."
iii. Reliance on asset investment yields
to justify a rate increase is prohibited unless
the insurer can demonstrate that its return on
investments is lower than the maximum valuation
interest rate for contract reserves for those
policies or the commissioner determines that a
change in interest rates is justified due to
changes in laws or regulations that are
retroactively applicable to long-term care
insurance previously sold in this state.
4. Provide that for LTC policies issued after the approval
of rate schedules under SB 898 of 2000 (Chapter 812,
Statutes of 2000) that beginning with the first rate
application filed after January 1, 2012, no more than one
rate increase for any policy form shall be approved in any
10-year period.
5. Also provides as follows:
a. Requires, except where the provisions of a
group contract provide otherwise, that for both pre-
and post-stabilization policies, loss experience on
all of an insurer's policy forms be pooled for
purposes of measuring loss ratios.
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| b. Clarifies that the power of the Insurance |
| Commissioner under current law to approve rate filings |
| includes approvals which are necessary to protect the |
| financial condition of the insurer, including |
| avoidance of further reductions in capital and |
| surplus. |
| |
| c. Requires, as part of required submittals for |
AB 999 (Yamada), Page 4
| prior approval of LTC rates, a statement that asset |
| investment yield rate changes have not been used to |
| justify the rate increase unless the insurer can |
| demonstrate that its return on investments is lower |
| than the maximum valuation interest rate for contract |
| reserves for those policies or the commissioner |
| determines that a change in interest rates is |
| justified due to changes in laws or regulations that |
| are retroactively applicable to long-term care |
| insurance previously sold in this state. |
| |
| d. For purposes of current law which requires |
| that premium rate schedule increases must demonstrate |
| that the sum of the accumulated value of incurred |
| claims, computed as required by law, this bill |
| provides that if the premiums in any rate revision |
| filing calculated in this manner produce a lifetime |
| expected loss ratio that is less than the highest |
| lifetime expected loss ratio for this policy form in |
| the initial filing or that for requested premium rates |
| in any filing made after January 1, 2012, the insurer |
| shall reduce the premiums in the filing so that the |
| current lifetime expected loss ratio is equal to or |
| greater than the highest initially filed loss ratio or |
| that for requested premium rates filed after January |
| 1, 2012. In the determination of a lifetime expected |
| loss ratio, the margin for moderately adverse |
| experience shall be reflected and shall not be |
| increased unless the manner in which risks are shared |
| between the insurer and block of policies has been |
| changed by this law or any future law or regulation. |
| The determination of the lifetime expected loss ratio |
| shall be based on the actual distribution of policies |
| issued and not any assumed distribution prior to |
| actual sales. |
| |
| |
| |
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COMMENTS
1. Purpose of the bill According to the Author, AB 999 is
intended to modify the LTC insurance premium rate
development process to protect consumers from excessive
premium rate volatility.
AB 999 (Yamada), Page 5
2. According to the bill's Sponsor, the California Department
of Insurance:
AB 999's rate-setting changes will "protect consumers" from
premium rate volatility and allow "consumers to review
policy language prior to the policy being purchased, thus
allowing the consumer to make a more informed decision."
The DOI also states, "Perhaps the most urgent issue
currently facing senior consumers today is the rising cost
of long-term care (LTC) insurance. LTC insurance was first
sold in California in the early 1980's. Since it was a new
product, insurers had no historical experience upon which
to rely on when setting initial premium rates. As a
result, initial pricing of LTC policies was often based
upon what were later found to be inaccurate assumptions for
lapse, mortality, and morbidity rates. As insurers gained
more experience in the LTC market, premium rates increased
to compensate for the initial pricing inaccuracies. In
response to LTC rate increases on a national level, the
National Association of Insurance Commissioners (NAIC)
adopted Model Laws in the late 1990's in order to stabilize
escalating LTC rates. Following these Model Laws, the
California State Legislature passed Senate Bill 898 (Dunn)
ÝChapter 812, Statutes of 2000]. The rate stabilization
features of SB 898 were intended to ensure adequate pricing
by requiring that insurers actuarially certify that initial
rates were "sufficient to cover costs under moderately
adverse experience," thereby protecting consumers against
the large rate increases that characterized
pre-stabilization LTC policies, among other consumer
protections.
Despite the adoption of rate stabilization laws designed to
control rate increases on LTC insurance policies, CDI and
insurance regulators nationwide are seeing an influx of
rate filings seeking significant rate increases on existing
policies. Some of these rate increases are as high as a
one-time increase of 60% or in the form of multiple
increases of 20 to 30%. Left unchecked, these rate
increases will threaten the ability of California
consumers, many which are on fixed incomes, to maintain the
protections they relied upon when initially purchasing
these policies."
3. Background and Discussion:
AB 999 (Yamada), Page 6
4. The most controversial feature remaining in this bill is the
mandatory 5 year span between rate changes for pre-rate
stabilization LTC policies and the 10 year span between rate
changes for post-rate stabilization LTC care policies. They
can be seen in the bill at page 11, lines 18-20 and page 13
at lines 34 to 36.
5. While these provisions will mitigate against rate changes
during the 5 and 10 year period respectively, the issue is
what will happen when the rate change window re-opens and
will spikes occur or will refinements to actuarial
methodologies, competitive pressures, and possibly new
market entrants put a downward pressure on prices changes.
While these factors may all tend to dampen rate increases,
long term rate stability requires adequate and actuarial
sound rates so whatever the underlying cost trends that are
unfolding over the 5 and 10 year spans respectively, these
trends will impact rates as they are identified. Ultimately,
the public needs a system where rates are realistic so their
own attempts at personal responsibility planning can proceed
in a realistic and well-founded fashion.
6. In an analogue to other contemporary debates, while a 5 or
10 year "holiday" from rate increases has undoubted appeal,
if at the end of the period "rate shocks" occur for holders
of LTC policies, this may precipitate a crisis for persons
long term personal responsibility planning.
7. The Long-Term Care Marketplace: Long-term care 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 long term care
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
AB 999 (Yamada), Page 7
qualify at all for this type of insurance.
8. 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 struggled in the early
development of LTC policies to analyze the potential for
future losses. In retrospect, many factors can be seen as
rendering that process difficult: increasing life
expectancies; life extending technology; faulty assumptions
on lapse ratios; and even basic predictions about what
nursing home care would cost. The result was that early LTC
buyers who bought policies they could afford found
themselves facing ed with very sharp and repeated premium
increases as a clearer understanding of expected loss costs
emerged.
9. 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.
10. Summary of Arguments in Support:
a. The Author and Sponsor arguments appear in the
"Purpose of the Bill" area above.
b. The National Association of Social Workers (NASW)
supports the bills for its ability to limit volatile rate
increases affecting vulnerable, senior communities.
c. The California Advocates for Nursing Home Reform
(CANHR) states AB 999 is a step in the right direction in
ensuring that California Long-term care Insurance
consumers are better protected from massive rate
increases. It states "AB 999 would limit the frequency of
that rates could be increased and limit the reasons why
rates could increase, and consumers of long-term care
insurance policies will be better informed about when and
if their rates would increase - this is especially
AB 999 (Yamada), Page 8
important for people with disabilities and seniors on
limited income".
d. The California Nurses association states "AB 999, we
believe, makes some changes that should improve the
situation going forward, essentially signaling to
insurers that they need to be more conservative in their
pricing to avoid the kind of premium spikes we have seen
lately. By allowing less frequent rate adjustments,
ensuring policyholders are not assuming investment risk,
and pooling open and closed blocks of business, we can
expect to see more conservative pricing and reduce the
likelihood of rate shocks for consumers."
11. Summary of Arguments in Opposition:
a. American Council of Life Insurers (ACLI), America's
Health Insurance Plans (AHIP), and the Association of
California Life and Health Insurance Companies (ACLHIC)
state "the bill in its current form still includes the
most objectionable provision that would be
counterproductive to those goals and could actually lead
to larger rate increases and more insureds dropping
coverage. These unintended consequences could have an
enormous impact on the state budget because these costs
are transferred to the Medi-Cal program as individuals
spend down to meet their long term care needs.
Specifically, the bill would impose a five year ban on
increasing rates on policies that were sold prior to
2002 when California's rate stabilization law was
implemented, and a ten year ban on increasing rates for
rate stabilized policies once there has been any rate
increase. As mentioned previously, the arbitrary ban on
premium rate increases over a five or ten year period
would increase the cost of long term care insurance,
potentially pricing many Californians out of this
important financial protection . This ban would also
exacerbate rate spikes, rather than eliminate them,
potentially causing many current insureds to drop their
existing coverage when they are older and more
vulnerable. These two outcomes could have a potentially
devastating impact on the state's Medi-Cal expenditures,
since baby boomers who do not have long term care
insurance will be forced to "spend down" to be eligible
for IHSS services or nursing home benefits. Medicare
does not provide coverage for long term care benefits."
AB 999 (Yamada), Page 9
American Council of Life Insurers (ACLI), America's
Health Insurance Plans (AHIP), and the Association of
California Life and Health Insurance Companies (ACLHIC)
are requesting that the committee consider a revised
approach to rate setting for the pre- and post-SB 898
LTC policies which would require carriers to "true up"
their rates more frequently or be subject to a 5 year
ban on rate changes.
As described in their letter, "ACLHIC, ACLI and AHIP
would propose the approach used in the Interstate
Compact and several other states which would protect
against large increases by ensuring that companies "true
up" their projections on an ongoing basis, making much
smaller adjustments in premium pricing, if necessary.
This approach would require annual reviews and the
filing of an actuarial memorandum every three years. It
would also require a company not meeting actuarial
projections to develop a reasonable plan of action to
address developing rate inadequacies. It will be
important for the company and Department of Insurance to
work together to make timely adjustments consistent with
that action plan to stabilize the block of business".
b. National Association of Insurance and Financial
Advisors of California (NAIFA-CA) and the California
Association of Health Underwriters (CAHU) state the long
term care insurance marketplace "is currently very
volatile and for many people the products are simply
unattainable". NAIFA-CA and CAHU also state "the most
objectionable provisions, which would impose a five year
ban on increasing rates on policies that were sold prior
to 2002 when California's rate stabilization law was
implemented, and a ten year ban on increasing rates for
rate stabilized policies, remain in the bill. These
bans would undoubtedly result in higher premiums and/or
larger increases after five or ten years, which will
mean that more individuals will need to "spend down" so
that they can have their long term care costs
transferred to Medi-Cal. It is imperative that we try
to protect against this outcome and try to ensure that
Californians continue to have available to them a broad
choice of affordable long term care insurance options.
Unfortunately, the bans that are currently in AB 999
will have the opposite outcome and could cost the state
AB 999 (Yamada), Page 10
millions of dollars in the long run."
c. The President of the Center for Long-Term Care
Reform, Stephen A. Moses, writes, "While AB-999's
intentions are good, its unintended consequences would
negate its goals if legislated. Insurance carriers base
premiums on actuarial estimates of risk. Arbitrarily
limiting rates or rate increases for other purposes,
however desirable, only interferes with this calculation
and distorts normal market decisions".
9. Amendments:
a. On page 9, line 12, strike out "or" and insert "of".
b. On page 11, line 18, strike out "Beginning" and in
insert "(f) Beginning"
c. The Author should note that the Legislative Counsel
Corrections Unit advises AB 999 requires a corrective
amendment to eliminate avoid a conflict with AB 1416.
10. Prior and Related Legislation:
a. SB 898 (Dunn) of the 1999-2000 Legislative Session
was enacted as Chapter 812, Statutes of 2000 to establish
the system of prior approval of LTC rates which AB 999
revises.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Department of Insurance (CDI) (Sponsor)
AARP
Alzheimer's Association, California Council
American Nurses Association of California (ANA\C) (with
amendments)
California Advocates for Nursing Home Reform (CANHR)
California Alliance for Retired Americans
California Commission on Aging
California Health Advocates (CHA)
California Nurses Association
California Professional Firefighters (CPF)
California School Employees Association, AFL-CIO
AB 999 (Yamada), Page 11
California Senior Legislature
Congress of California Seniors
Consumer Federation of California
Gray Panthers of Sacramento
National Association of Social Workers
State (of California) Independent Living Council (SILC)
Opposition
American Council of Life Insurers (ACLI)
America's Health Insurance Plans (AHIP)
Association of California Life and Health Insurance Companies
(ACLHIC)
California Association of Health Underwriters (CAHU)
Center for Long-Term Care Reform President Stephen Moses
( www.centerltc.com )
Marion Somers, Ph.D, ( www.drmarion.com )
LTC Consultants President Phyllis Shelton,
( www.LTCiTraining.com )
LTC Partners and Insurance Services, LLC
National Association of Insurance and Financial Advisors of
California (NAIFA-Ca)
Plan Financial, Inc.
Weitzman-Shenefield & Associates
Numerous Individuals
Consultant: Ken Cooley (916) 651-4110