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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