BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                AB 999
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        CONCURRENCE IN SENATE AMENDMENTS
        AB 999 (Yamada)
        As Amended  August 23, 2012
        Majority vote
         
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        |ASSEMBLY:  |42-33|(June 1, 2011)  |SENATE: |21-12|(August 29,    |
        |           |     |                |        |     |2012)          |
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         Original Committee Reference:    INS.  

         SUMMARY  :  Modifies the long-term care (LTC) insurance rate 
        development process.  

         The Senate amendments  :

        1)Delete the "5-year/10-year" prohibition that would have precluded 
          an LTC insurer from filing a subsequent rate increase application 
          after having obtained, after the effective date of the bill, a 
          rate increase approval.

        2)Add language that mandates a premium reduction in the event of a 
          subsequent rate filing that is made after the LTC insurer has 
          obtained its initial rates, if the subsequent rate filing shows 
          that the expected lifetime loss ratio is lower than the expected 
          lifetime loss ratio reflected in the initial filing.

        3)Adopt actuarial criteria, including a requirement that experience 
          data on all similar LTC forms be aggregated, for purposes of 
          evaluating a rate increase application.

        4)Provide the Insurance Commissioner with discretion to allow a 
          lower premium increase than actuarially indicated if he or she 
          determines it is in the interest of California policyholders.

         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.









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        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 Insurance Commissioner (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 
          Department of Insurance (DOI) internet Web site.


         AS PASSED BY THE ASSEMBLY  , this bill:

        1)Required every LTC insurer to make available a specimen of each 
          individual or group policy form it sells.

        2)Required the IC to post on the 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)Provided 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)Prohibited reliance on asset investment yields as a justification 
          for rate increases, subject to limited exceptions.

        5)Required that loss experience on an insurer's policy forms be 
          pooled for purposes of measuring loss ratios, as specified.

        6)Limited the approval of rate increases on pre-stabilization 
          policies to no more than once every five years.

        7)Limited the approval of rate increases on post-stabilization 
          policies to no more than once every 10 years.









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        8)Provided 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.

         COMMENTS  :  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.

        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 2000s 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 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 








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        premium increases as the industry began to see actual costs 
        develop.

        The industry and regulators in the late 1990s 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, 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, 
        and are no longer opposed to the bill.


         Analysis prepared by  :    Mark Rakich / INS / (916) 319-2086


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