BILL ANALYSIS Ó
SENATE COMMITTEE ON INSURANCE
Senator Richard Roth, Chair
2015 - 2016 Regular
Bill No: SB 575 Hearing Date: April 22,
2015
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|Author: |Liu |
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|Version: |February 26, 2015 |
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|Urgency: |No |Fiscal: |No |
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|Consultant:|Hugh Slayden |
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Subject: Long-term care insurance
SUMMARY Would require long-term care insurers to provide annual
notification of the availability and amount of contingent
benefits to the insured and, upon the insured's designation, at
least one other individual.
DIGEST
Existing law
1. Requires approval by the Insurance Commissioner (IC) of any
rate or rate adjustment applied to long-term care insurance
(LTCI) policies before the policy may be offered, sold,
issued, or delivered to a resident of this state.
2. Permits the IC to require, as a condition of approval of a
rate adjustment, that an insurer administer a contingent
benefit upon lapse as described in specified subsections of
Section 26 of the October 2000 version of the Long-Term Care
Insurance Model Regulation promulgated by the National
Association of Insurance Commissioners (NAIC).
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3. Prohibits insurers from issuing a LTCI policy or
certificate (for group policies) until the applicant has
been given the right to designate at least one individual in
addition to the applicant ("third-party") to receive notice
of lapse or termination of a policy or certificate for
nonpayment of premium and requires insurers to receive from
each applicant either:
a. A written designation of at least one third-party
recipient, in addition to the applicant, who is to
receive notice of lapse or termination for nonpayment of
premium ("designation of a third-party recipient").
b. A waiver signed and dated by the applicant
("waiver").
4. Requires insurers to notify insureds of the right to change
a written designation at least every two years ("biennial
reminder").
5. Prohibits insurers from terminating an LTCI policy or
certificate until 30 days after a notice of lapse has been
sent to the policyholder and any designee(s).
This bill
1. Requires insurers to annually notify a policyholder or
certificate holder (referred to collectively as
"policyholder") who elected a contingent benefit on lapse
("contingent benefit") that the benefit is available, the
dollar value, and specified contact information for the
insurer ("annual notice").
2. Require insurers, 90 days after receiving notice that the
policyholder has elected a contingent benefit, to send a form
notifying the insured that he or she has the right to designate
a third-party to receive an annual notice of the contingent
benefit and requires the insurer to receive from each applicant
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either:
a. A designation of third-party recipient.
b. A waiver.
1. Requires insurers to send biennial reminders to
policyholders of the right to change the third-party
recipient.
COMMENTS
1. Purpose of the bill According to the author, existing law
gives eligible long-term care policyholders facing large
rate hikes they could not afford the right to stop paying
premiums and bank a benefit amount for potential later use
in the amount of premiums they had already paid.
Individuals who lapse their long-term care insurance (LTCI)
policies and "bank" contingent benefits do not receive
periodic notification from the insurer that these benefits
are available. Without notification these individuals and
their families can easily lose track of the existence of the
benefits, especially if the insured suffers from cognitive
impairment. These individuals and families likely end up
paying for care or doing without when, in fact, benefits are
available.
2. Background LTCI covers the costs of long-term care services
when insureds are unable to take care of themselves.
Coverage is triggered when an insured develops a "chronic
illness" typically defined as an inability to perform a set
number of "activities of daily living" such as feeding,
dressing, and bathing themselves, or a cognitive impairment
(such as Alzheimer's Disease). A policy may cover facility
care or home care or both.
LTCI History and Rate Increases. Insurers first sold LTCI
covering nursing homes in the 1970s and expanded coverage in
the 1980s to cover other types of facilities and home care.
Unfortunately, many insurers failed to accurately estimate
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future costs and losses. Increasing life expectancies,
faulty assumptions on lapse ratios and the cost of care,
coupled with the poor performance of insurer investments,
drove dramatic increases in LTCI premiums. Attempts to
stabilize rates had limited impact and some carriers are
still requesting and waiting on approval for additional rate
increases.
A rate hike can be a hardship on consumers, particularly
retirees or other people on a low, fixed incomes.
Nonetheless, policyholders tend to keep their policies.
Unlike some life insurance policies, LTCI policies have no
independent value; if the policy lapses, the owner will
likely lose all benefits unless the owner purchased an
optional "nonforfeiture benefit," governed under Section in
Section 10235.30, that provides very limited coverage
despite the policy lapse. Because rate increases can be
devastating to vulnerable consumers, California law provides
additional consumer protections.
Notices and Forms Required by Insurance Code Section
10235.40. California law provides procedural measures
designed to help consumers avoid unintentional lapse due to
nonpayment of premium. Insurance Code Section 10235.40
requires insurers to notify the policyholder that he or she
has the right to designate a third-party that will also
receive a notice if the policy is about to terminate due to
missed premium payments ("notice of lapse"). Prior to
issuing or delivering a policy, an insurer must provide and
collect from the policyholder either a designation of
third-party recipient or a waiver. The insurer must also
send a biennial reminder that the policyholder has the right
to change the designee ("biennial reminder").
Contingent Benefit on Lapse. Another consumer protection,
the contingent benefit on lapse ("contingent benefit"),
provides minimum coverage for some policyholders who did not
purchase a nonforfeiture benefit and are forced to lapse
their policies because of a substantial rate increase. If
over the life of a policy, the insurer increases premiums
beyond a specified threshold, the IC may require the insurer
to offer the policyholder a contingent benefit, along with
other options (such as a shorter coverage period), that the
policyholder may elect instead of a rate increase. The
policyholder may elect the contingent benefit or will be
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deemed to have elected the contingent benefit if the policy
lapses within 120 days of the due date of the increased
premium. The thresholds are based on the age of the
policyholder and the premium at the time the policy was
issued; the older the policyholder, the lower the threshold.
When a contingent benefit vests, the policy converts to the
equivalent of a "paid up policy," i.e. no more premium
payments are due, with a benefit equal to the greater of
100% of all premiums paid or 30 times the daily nursing home
benefit amount (but never any more than the maximum benefit
had the underlying policy remained in force). The benefit
may be used for care and services as provided under the
terms of the policy.
This Bill: The Proposed Notice of Contingent Benefit. This
bill would require insurers to send a notice to
policyholders who have elected a contingent benefit that
provides basic information about the benefit. This bill
would also require the insurer to duplicate the process
provided in Section 10235.40 regarding the designation of a
third-party recipient, including the requirement to collect
a response from the policyholder and provide biennial
reminders.
3. Support Several proponents argue that individuals who lapse
their LTC policies and "bank" contingent benefits do not
receive periodic notification from the insurer that these
benefits are available. Without notification these
individuals and their families can easily lose track of the
existence of the benefits, especially if the insured suffers
from cognitive impairment, a not uncommon occurrence. These
individuals and families may end up paying for care or doing
without when, in fact, benefits are available.
4. Opposition
a. The Association of California Life and Health
Insurance Companies (ACLHIC) and the American Council of
Life Insurers (ACLI) argue that the addition of another
third party notice requirement could be confusing to all
parties because - with separate designations - a consumer
could potentially designate different individuals, one
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for notice of lapse and a different one for a contingent
benefit upon lapse. It would not only be confusing to the
consumer but also create the potential for administrative
error in tracking all original and updated designees.
b. They also express concern that the proposal would be
challenging to implement, particularly since as the exact
amount of the contingent benefit to be provided may not
be readily available.
c. ACLHIC and ACLI further explain that the existing
third party designee for nonpayment of premium notice
must be designated prior to policy issue (at
application), whereas this proposal requires that 'the
insurer shall mail and receive' the third party
designation for contingent benefit within 90 days after
the contingent benefit has been elected. They question
how an insurer might force a policyholder to respond and,
if the consumer does not respond, what the company could
do about it.
5. Question Rather than requiring an insured to confirm or
change a designation made under Section 10235.40, should any
existing designation automatically apply to the annual
notice required under this bill?
6. Suggested Amendments
a. Consumers who have purchased nonforfeiture benefits
may also lose track of those benefits once they have
vested. The committee may wish to consider amendments
that expand the bill to cover purchased nonforfeiture
benefits described in Section 10235.30.
b. The committee may wish to consider amendments that
provide that failure of an insured to return the election
form shall be deemed a waiver described in paragraph (3)
of subdivision (a).
c. Contingent benefits do not lapse and it is
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unnecessary for an insurer to continue sending biennial
reminders or track designation under Section 10235.40 for
holders of a contingent benefit. The committee may wish
to consider amendments that clarify existing law so that
Section 10235.40 will not apply to any policy subject to
the provisions of this bill.
d. Concerns have been raised that alteration of
existing systems may require substantial resources to
alter the system necessary to provide an automatic
calculation of the value of existing benefits. It is
unknown how many of these contingent benefits are
currently held, but since lapse rates, for all reasons,
are very low (.5 to 1.5% per year) there are probably
relatively few consumers holding these benefits.
Additionally, it would be helpful to know how many
policies would ever be likely to reach the contingent
benefit threshold since the implementation of rate
reforms. Without knowing how many consumers will be
impacted and without an estimate of the costs to each
insurer and the aggregate costs system wide, the
committee may wish to consider amendments that would
allow the insurer to notify the insured that he or she
may request a statement of the current value of the
policy at any time instead of automatically requiring an
individualized calculation for every statement.
e. Rather than requiring a separate document or mailing
for the biennial reminder, permit the insurer to
consolidate the biennial reminder with the annual notice.
f. Apply the terms of the bill to policyholders who are
deemed to have elected a contingent benefit by operation
of law or contract.
1. Prior and Related Legislation
a. AB 1804 (Perea) Chapter 380, Statutes of 2014,
requires insurers to maintain a process that allows
policyholders to designate in writing or electronic
transmission at least one third-party recipient to
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receive a notice of lapse or nonrenewal for nonpayment of
premium for private passenger auto, certain residential
property, and individual disability income insurance
policies.
b. AB 1747 (Feuer), Chapter 315, Statutes of 2012,
requires insurers to permit holders of life insurance
policies to designate in writing at least one other
person to receive notice of lapse for nonpayment.
c. SB1810 (Dunn), Chapter 312, Statutes of 2006,
authorized the IC to require a LTCI carrier to offer a
contingent benefit, as specified, as a condition of
approval of a modification to a rate schedule.
d. SB1052 (Vasconcellos), Chapter 699, Statutes of
1997, requires insurers to permit holders of long-term
care policies to designate in writing at least one other
person to receive notice of lapse for nonpayment and
prohibits termination of a LTCI policy for nonpayment
until that notice has been mailed 30 days before
termination of the policy.
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POSITIONS
Support
California Department of Insurance (Sponsor)
The Arc and United Cerebral Palsy California Collaboration
California Advocates for Nursing Home Reform
California Commission on Aging
California Health Advocates
California Retired Teachers Association
Congress of California Seniors
National Association of Social Workers, California Chapter
Oppose
American Council of Life Insurers
Association of California Life and Health Insurance Companies
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