BILL ANALYSIS Ó SENATE COMMITTEE ON INSURANCE Senator Richard Roth, Chair 2015 - 2016 Regular Bill No: AB 2366 Hearing Date: June 22, 2016 ----------------------------------------------------------------- |Author: |Dababneh | |-----------+-----------------------------------------------------| |Version: |March 16, 2016 Amended | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Hugh Slayden | | | | ----------------------------------------------------------------- Subject: Long-term care insurance SUMMARY Exempts insurers that offer a policy which combines both life and long-term care coverages from the requirement to offer the new benefits or benefit eligibility criteria to their existing long-term care insurance (LTCI) policy. DIGEST Existing law 1. Provides for the regulation of LTCI and life insurance by the California Department of Insurance (CDI) and prescribes various requirements and conditions governing those products. 2. Requires LTCI carriers to offer new benefit or benefit eligibility criteria to existing policyholders as either a replacement policy or a rider on the existing policy. 3. Authorizes the Insurance Commissioner to waive the requirement under certain conditions. This bill AB 2366 (Dababneh) Page 2 of ? 1. Clarifies that the offer must be made within 12 months that the new policy series is made available in this state. 2. Limits, for all LTCI policies, the requirement to offer new benefits to only those changes that are material in nature, but not to "minor" changes such as changes to elimination periods, benefit periods, and benefit amounts. 3. Exempts all life insurance policies or riders that contain accelerated LTCI benefits. COMMENTS 1. Purpose of the bill According to the author, existing law requires insurers offering new LTCI policies to offer the "new" coverage to their existing LTCI policyholders whenever a new product is developed and approved for sale in the state. The offer statute was established when individual "standalone" LTCI policies were the standard, but is now being applied to "hybrid" products for policyholders where it often does not make sense. Hybrid products typically pay for LTCI expenses by accelerating the death benefit of a life insurance policy or annuity contract, while standalone LTCI products are based on premiums paid specifically for LTCI benefits. The offer requirement hinders the ability of companies to make new products available for consumers, creates a compliance debacle for new hybrid products, and can be extremely confusing or misleading to existing policyholders. The author further states that this bill represents a modest change in the law that will assist in the development of new innovative LTCI products, as wells as protect many existing policyholders from being needlessly confused by an updated offer every time a new LTCI product is developed. 2. Background LTCI is a product with a troubled history that has spawned a rigorous regulatory regime. LTCI policies are subject to a myriad of regulatory controls including prior approval requirements for policies and advertisements, rate regulation, and mandated benefits. These elaborate controls AB 2366 (Dababneh) Page 3 of ? have arisen from problems that prior LTCI products have had in both product design (what services are covered and in what quantity) and pricing. Many early products only covered a narrow range of services (mostly institutional care) and did not cover needed services (LTCI services are increasingly provided at home and in non-institutional settings). Additionally, these policies were severely underpriced leading to drastically increasing premiums that have grown are unaffordable for retirees with fixed incomes. Consumers are purchasing fewer policies and carriers are leaving the market. In this year alone, two carriers have suspended sales of individual products, leaving 10 carriers actively selling individual LTCI in California. Both LTCI consumers and insurers must anticipate service needs and options decades before claim would likely be filed. Rapid development of medical and other technologies that are changing the way we age and die in dramatic ways make needs even less predictable. Even if the "what" of services doesn't change over that time span, the "how" and the cost of LTC services will likely be very different in 20 years. Insurers have combined life insurance and LTCI to make the product appealing to a broader range of consumers. These products offer a sort-of "two-for-one" that provides some LTCI coverage and a death benefit. Although not cheaper than an LTCI policy, they are likely less expensive than purchasing two separate policies. These new products are relatively new and have increased in popularity as concerns have grown over premium increases, regulatory challenges, and hostile markets, for LTCI. These policies "accelerate" the death benefit when the insured develops a qualifying disability. Use of the LTCI benefit reduces the death benefit. These policies are sometimes referred to as "hybrid" products and are offered as a single package or the LTCI benefit may be offered as a rider. These contracts otherwise behave like, and are subject to most of the same Insurance Code provisions as standard LTCI policies, except they use an underlying life insurance policy to fund the benefit. Life Insurance. In addition to a variety of LTCI benefit AB 2366 (Dababneh) Page 4 of ? options, life insurance comes in a variety of forms. Whole life insurance usually remains in effect over the life of the insured. Premium payments remain level, but early payments exceed the actual cost of insurance. The extra premium builds a reserve (cash value) which helps pay for the policy in later years as the cost of protection rises. Universal life (UL) insurance offers a flexible alternative because it allows the policyholder to change or skip premium payments or change the death benefit more easily. The policy, premium, death benefit and cash value are treated separately. Cash values are accumulated by crediting premium payments and interest to a fund from which deductions are made for the expenses and cost of insurance. Interest rates are linked to an external index such as Treasury bills. Because the cash value element of this type of policy is interest rate sensitive, predictions of future costs are highly dependent upon the accuracy of interest rate projections. Recently, some insurers have dramatically increased premiums as a result of pervasive low interest rates. Variable life insurance anchors the value of the death benefit based on the performance of the investments underlying the policy. Variable universal life insurance combines the flexibility of universal life insurance with the investment account features of variable life insurance. Hybrid products may have a financial structure particular to the specific type of life insurance product upon which it is based (whole life, universal life, variable life, etc.) and within each type there are different methods of allocating premiums and earnings. The LTCI benefits may be highly integrated with the underlying policy or added on, in other words the LTCI may be "built-in at the factory" or "bolted on." Existing law requires LTCI carriers to offer new benefits and benefit eligibility criteria to existing policyholders. This gives the policyholders an opportunity to update their policy. However, because the new LTCI benefit might not match or graft well onto the underlying life policy, forcing new benefits to a mismatched life policy may produce detrimental or nonsensical results. AB 2366 (Dababneh) Page 5 of ? Replacement Policies. Concerns have been raised that offering consumers of new LTCI benefits may invite them to purchase new benefits that may not be appropriate. Consumer protections are in place and agents and brokers must go through a special process for "replacement" policies, but these replacements are not subject to all consumer protections applicable to standard LTCI policies. The NAIC LTCI Model Regulation. The National Association of Insurance Commissioner adopts model laws and regulations and establishes national standards. This bill would more closely conform California law to the NAIC's LTCI model regulation. 3. Support The sponsors, Association of California Life and Health Insurance Companies and the American Council for Life Insurers support this bill because they argue existing law impedes the development of innovative products and may confuse consumers. They suggest that it would not be appropriate to force an insurer that develops a new whole life-LTCI product to offer the new LTCI features to consumers with universal life insurance. As a specific example, an LTCI feature designed for whole life insurance that funds additional LTCI benefits with dividends paid to the policyholder would be meaningless when attached to a universal life policy that does not pay dividends. 4. Concerns California Health Advocates (CHA) has not taken a formal position on the bill, but expresses concerns about exempting hybrid policies. CHA writes that the insurance sold to cover long-term care costs has changed dramatically over the last few decades. The baby boom generation has changed every institution it has passed through - from schools to employment. LTCI policies will inevitably change as well. Given that there has been a shift from traditional LTCI to combination products, CHA believes that the offer of new benefits or benefit eligibility is a necessary consumer protection. 5. Questions a. How frequently do consumers elect to purchase the AB 2366 (Dababneh) Page 6 of ? new benefits when offered for all types of LTCI coverage? b. How many hybrid products have been approved that trigger the obligation to offer the new benefit to existing policyholders? 6. Prior and Related Legislation SB 1091 (Liu) would define and establish standards for alternate plans of care that permit an LTCI insurer, insured, and the insureds medical provider to agree that the policy will provide care that is not covered under existing policy terms. SB 1348 (Liu) would require the Partnership for Long-Term Care to provide additional and more affordable LTCI policy options and would establish a task force to consider more affordable policy design options. POSITIONS Support Association of California Life and Health Insurance Companies (sponsor) American Council of Life Insurers National Association of Insurance and Financial Advisors - California Oppose None received -- END -- AB 2366 (Dababneh) Page 7 of ?