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 ?