BILL ANALYSIS Ó AB 999 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 999 (Yamada) As Amended August 23, 2012 Majority vote ----------------------------------------------------------------- |ASSEMBLY: |42-33|(June 1, 2011) |SENATE: |21-12|(August 29, | | | | | | |2012) | ----------------------------------------------------------------- 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. AB 999 Page 2 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. AB 999 Page 3 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 AB 999 Page 4 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 FN: 0005805