BILL ANALYSIS Ó
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
AB 999 (Yamada) Hearing Date: June 13, 2012
As Amended: June 7, 2012
Fiscal: Yes
Urgency: No
VOTES: Asm. Floor(06/01/11)42-33/Pass
Asm. Appr. (05/27/11)11-06/Pass
Asm. Ins. (05/04/11)07-05/Pass
SUMMARY Would revise long-term care insurance oversight to
enhance consumer information and revise rate calculation
requirements.
DIGEST
Existing law
1. Provides for the regulation of insurers by the Department of
Insurance, including insurers issuing policies of long-term
care insurance;
2. Regulates the marketing or solicitation of long-term care
insurance policies and, in that regard, requires specified
disclosures to prospective applicants or enrollees;
3. Requires the Insurance Commissioner to annually prepare a
consumer rate guide for long-term care insurance and to
include specified information;
4. Requires the premium rate schedules for all individual and
group long-term care insurance policies issued in this state
to be filed with, and receive the prior approval of, the
Insurance Commissioner before the policy may be offered,
sold, issued, or delivered to a resident of this state;
AB 999 (Yamada), Page 2
5. Requires an insurer of long-term care insurance to submit to
the Insurance Commissioner for approval all proposed premium
rate schedule increases and to include specified information
with the rate application. Approval of all premium rate
schedule increases is subject to specified criteria.
This bill
1. Would require an insurer of long-term care insurance to
clearly post on its Internet Web site and provide written
notice at the time of solicitation that a specimen
individual policy form or group master policy and
certificate form for each policy form offered by the insurer
is available upon request and to provide that form within 15
calendar days upon request;
2. Would require the annual consumer rate guide to include a
specimen outline of coverage for each product currently
marketed by each insurer listed in the rate guide;
3. Would provide that if the premiums in any rate revision
filing calculated pursuant to those criteria produce a
lifetime expected loss ratio that is less than the highest
lifetime expected loss ratio for the policy form in the
initial filing or for requested premium rates in any filing
made after January 1, 2013, the insurer would be required
to reduce the premiums in that filing such that the current
lifetime expected loss ratio is equal to or greater than the
highest filed loss ratio, as specified;
4. Would set forth criteria for calculating the margin in the
determination of a lifetime expected loss ratio;
5. Would also prohibit, for those policies, an insurer from
justifying a rate increase prior to approval by the
Insurance Commissioner based upon asset investment yield
rate changes, except as specified, and would require all of
the experience on all similar long-term care policy forms
issued by an insurer and its affiliates and retained within
AB 999 (Yamada), Page 3
the affiliated group to be pooled together and used as the
basis for determining whether an increase is reasonable or
shall be approved under specified provisions;
6. Would require similar long-term care policy forms to be
classified into benefit classifications of nursing facility
and residential care facility only, home care only, or
comprehensive long-term care benefits.
COMMENTS
7. Purpose to this bill To modify the long-term care "LTC"
insurance premium rate development process to protect
consumers from excessive premium rate volatility.
8. Background and Discussion
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
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 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
AB 999 (Yamada), Page 4
nursing home care would cost. The result was that early LTC
buyers who bought policies they could afford faced sharp and
repeated premium increases as a clearer understanding of
expected loss costs emerged.
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
California Department of Insurance (CDI), 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.
AB 999 as Amended on June 7, 2012. Recent author's
amendments, adopted on June 7, 2012, struck the most
controversial feature in this bill relating to time limits
when an insurer could receive a rate change. Based on the
new version of the bill, the Committee has received notice
that the Association of California Life and Health Insurance
Companies (ACLHIC), American Council of Life Insurers
(ACLI), America's Health Insurance Plans (AHIP), California
Association of Health Underwriters (CAHU), and the National
Association of Insurance and Financial Advisors (NAIFA- CA)
have removed their opposition from the bill and now have a
neutral or no position.
The bill currently contains provisions relating to the
following:
a. Consumer Rate Guide and Notice of Solicitation .
Requires the Commissioner's annual LTC insurance rate
guide to include a specimen outline of coverage for each
product currently marketed by each insurer listed in the
rate guide. (Available on the CDI Website.) Also
requires insurers to make a specimen available within 15
calendar days of a request.
b. Changes to the Calculation of Premium Rates and
Loss Ratios . Establishes that a company may not target
a lifetime loss ratio lower than the higher of (i) the
minimum required by law or (ii) the target loss ratio
AB 999 (Yamada), Page 5
disclosed in a past filing by the company.
An expected lifetime loss ratio is the percentage of each
premium dollar an insured anticipates spending on claims
over the life of a policy and is used to set the
parameters for premium rates. The lower the ratio, the
less the insurer anticipates spending during the life of
the policy. This ratio will be calculated at the initial
filing and for subsequent rate revision filings. This
provision revises the statutory floor for loss ratios by
considering ratios from past filings.
c. Application to Group Policies . Applies provisions
of this bill to group policies including the general
prohibition against the use of investment performance to
justify rate increases and the requirement to pool risk
associated with similar policies.
d. Asset Investment Yield Rate Changes . Establishes
that, for new policy pricing, the insurer may not
justify rate increases based on the insurer's negative
investment results, except under specific circumstances.
e. Pooling of Similar Policies . When an insurer stops
selling a certain policy to new applicants, this is
known as closing a block of business. While existing
insureds are allowed to remain on the policy, new
insureds will not be added by which to spread maturing
risk. AB 999 requires that rate increase filings
consider the experience across all similar LTC forms
written by the insurer and its affiliates, in essence
pooling the experience of both closed and open blocks of
business.
f. Fail-safe Provision . Permits the Commissioner to
approve rate revisions if the insurer demonstrates that
the rates are necessary to protect the financial
condition of the insurer.
1. Summary of Arguments in Support
AB 999 (Yamada), Page 6
a. Consumer Rate Guide and Notice of Solicitation .
The California Professional Firefighters, the State
Independent Living Counsel, and the California
Commission on Aging note that this bill would ensure
that consumers can adequately review policies before
entering into agreements.
b. Changes to the Calculation of Premium Rates and
Loss Ratios . According to the Consumer Federation of
California (CFC) and California Health Advocates (CHA),
provisions related to the lifetime loss ratio and the
target loss ratio will reduce the likelihood of an
insurer using a "teaser rate" to entice an initial
purchase and prevent an insurer from using a loss ratio
that is a moving target. The Congress of California
Seniors state that loss ratio requirements must be
brought into conformity with model requirements of the
National Association of Insurance Commissioners (NAIC).
c. Asset Investment Yield Rate Changes . CFC and CHA
support AB 999 because it prohibits insurers from
shifting the impact of poor investment results to the
insured.
d. Pooling of Similar Policies . CHA writes that
insurers should be required to base a rate increase upon
experience spread across all LTC forms written in the
state to discourage companies from rapidly closing off
books of business while introducing new products with
minor variations.
e. California Advocates for Nursing Home Reform and
Gray Panthers of Sacramento support AB 999 because it
will limit the justifications for rate increases and
allow consumers to be better informed about the policies
and rate increases.
1. Summary of Arguments in Opposition
The Center for Long-term Care Reform argues that insurance
AB 999 (Yamada), Page 7
carriers base premiums on actuarial estimates of risk.
Arbitrarily limiting rates or rate increases for other
purposes, however desirable, only interfere with this
calculation and distort normal market decisions.
2. Prior and Related Legislation
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.
POSITIONS (Received prior to the June 2011 hearing unless
otherwise noted)
Support
California Department of Insurance (CDI) (Sponsor) ÝJune 6,
2012]
AARP
Alzheimer's Association, California Council ÝJune 4, 2012]
California Advocates for Nursing Home Reform (CANHR)
California Alliance for Retired Americans
California Commission on Aging
California Health Advocates (CHA)
California Nurses Association ÝJune 5, 2012]
California Professional Firefighters (CPF) ÝJune 7, 2012]
California School Employees Association, AFL-CIO ÝMay 22, 2012]
California Senior Legislature
Congress of California Seniors
Consumer Federation of California ÝJune 6, 2012]
Gray Panthers of Sacramento
National Association of Social Workers ÝJune 4, 2012]
State (of California) Independent Living Council (SILC)
Opposition
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.
AB 999 (Yamada), Page 8
Weitzman-Shenefield & Associates
Numerous Individuals
Consultant: Hugh Slayden, (916) 651-4773