BILL ANALYSIS Ó SENATE COMMITTEE ON INSURANCE Senator Richard Roth, Chair 2015 - 2016 Regular Bill No: SB 575 Hearing Date: April 22, 2015 ----------------------------------------------------------------- |Author: |Liu | |-----------+-----------------------------------------------------| |Version: |February 26, 2015 | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |No | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Hugh Slayden | | | | ----------------------------------------------------------------- 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). SB 575 (Liu) Page 2 of ? 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 SB 575 (Liu) Page 3 of ? 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 SB 575 (Liu) Page 4 of ? 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 SB 575 (Liu) Page 5 of ? 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 SB 575 (Liu) Page 6 of ? 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 SB 575 (Liu) Page 7 of ? 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 SB 575 (Liu) Page 8 of ? 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. SB 575 (Liu) Page 9 of ? 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 -- END --