BILL ANALYSIS Ó
SB 575
Page 1
SENATE THIRD READING
SB
575 (Liu)
As Amended July 13, 2015
Majority vote
SENATE VOTE: 36-0
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|Committee |Votes|Ayes |Noes |
| | | | |
| | | | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Insurance |13-0 |Daly, Beth Gaines, | |
| | |Travis Allen, | |
| | |Calderon, Cooley, | |
| | |Cooper, Dababneh, | |
| | |Frazier, Gatto, | |
| | |Gonzalez, Grove, | |
| | |Mayes, Rodriguez | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Aging |7-0 |Brown, Hadley, | |
| | |Gipson, Gray, Levine, | |
| | |Lopez, Mathis | |
| | | | |
| | | | |
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SB 575
Page 2
SUMMARY: Requires insurers to provide notice to holders of
long-term care (LTC) insurance, and their designees, if
contingent benefits or nonforfeiture benefits are triggered.
Specifically, this bill:
1)Requires insurers to notify LTC policyholders when a
contingent benefit on lapse or a non-forfeiture benefit is
triggered, and annually thereafter, that the benefit is
available, including the dollar value of the benefit.
2)Requires the notice to provide the insured with the
opportunity to designate another person to receive a copy of
the notice.
3)Requires the notice to include contact information for the
insurer.
EXISTING LAW:
1)Requires insurers to offer applicants for LTC insurance the
option to purchase a nonforfeiture benefit that would provide
a fixed benefit equal to the greater of the amount of premium
paid or three months of care at a nursing facility should the
policy lapse.
2)Requires insurers to offer applicants the opportunity to
designate at least one individual in addition to the applicant
to receive notice of lapse or termination of a policy for
nonpayment of premium and requires insurers to receive from
each applicant either:
a) A written designation of at least one third-party
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recipient, in addition to the applicant, who is to receive
notice of lapse or termination for nonpayment of premium;
or
b) A waiver signed and dated by the applicant notifying the
insurer that the policyholder elects not to make a
designation.
3)Requires insurers to notify policyholders of the right to add
or change a designation at least every two years.
4)Requires approval by the Insurance Commissioner (commissioner)
of any rate or rate adjustment applied to LTC policies before
a policy may be offered, sold, issued, or delivered to a
resident of this state.
5)Permits the commissioner to require an insurer, as a condition
of approval of a rate adjustment that exceeds a specified
threshold, to administer a contingent benefit upon lapse that
would provide the insured a minimum lifetime benefit that is
at least the equivalent value of the greater of the amount of
premiums paid or 30 times the daily nursing home benefit at
the time of lapse.
FISCAL EFFECT: Undetermined. This bill is keyed non-fiscal by
the Legislative Counsel.
COMMENTS:
1)Purpose. 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
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benefit amount for potential later use in the amount of
premiums they had already paid. Individuals who lapse their
LTC insurance 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)Long Term Care. LTC services provide individuals who, because
of illness or disability, are generally unable to perform
activities of daily living, such as bathing, dressing,
toileting, and getting around the house, or suffer from
cognitive impairments. LTC services are provided in a variety
of settings, such as nursing homes, assisted living
facilities, and private residences. Only about 20% of the
elderly who need LTC services live in an institutional
setting. The roughly 80% living in the community primarily
live in private homes, but a small number live in residential
communities catering to the needs of elderly people. For
those living at home, most receive assistance from unpaid
family members and friends (referred to as informal care)
while some pay for assistance (referred to as formal care)
from home health aides. Elderly people with severe functional
and cognitive limitations who require around-the clock
assistance often live in institutional settings. According to
data from the Medicare Current Beneficiary Survey, the elderly
nursing home population has declined over the past 10 years as
more elderly people are living in residential care facilities,
community-based housing with supportive services, and in their
homes.
3)Notices and Forms. California law provides procedural
measures designed to help consumers avoid unintentional lapse
due to nonpayment of premium. Insurers are required to notify
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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.
4)Contingent Benefit on Lapse. A consumer protection provided
for LTC policies is the contingent benefit on lapse. The
benefit provides minimum coverage for some policyholders who
did not purchase a nonforfeiture benefit and are forced to
lapse their policies because of substantial rate increases.
If over the life of a policy, the insurer increases premiums
beyond a specified threshold, the commissioner 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
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 threshold required to trigger this benefit falls
as the insured ages. When a contingent benefit is triggered,
no more premium payments are due and the policy provides a
benefit equal to the greater of all premiums paid or 30 times
the daily nursing home benefit amount. The benefit may be
used for care and services as provided under the terms of the
policy.
5)Problems With LTC Insurance. The long-term care insurance
marketplace is problematic for both insurers and consumers.
Many insurers have stopped selling new LTC policies. Insurers
have struggled with setting premiums adequate to cover their
costs in the absence of sufficient claims data. LTC insurance
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is a relatively new product that requires years of paying
premiums before claims are made. Only in recent years have
the insurers begun to receive claims for many of the policies
sold early on, and those claims have been much higher than the
insurers anticipated. In addition to misjudging the cost of
claims, insurers have struggled with anticipating policy lapse
rates, LTC inflation, and life span increases. All of those
factors, and others, have led to LTC insurance being much more
expensive than previously expected. The early mistakes in
pricing LTC policies has led to rounds of major premium
increases which adds marketing challenges to a product that is
already, according to insurance agents, difficult to sell.
Unlike some life insurance policies, LTC policies have no
independent value. If the policy lapses, the owner will
likely lose all benefits unless the owner purchased an
optional nonforfeiture benefit that allows the insured to keep
a limited benefit based on the premiums already paid.
CalPERS is a recent example of an LTC insurer that
underestimated the cost of insuring LTC. It has pushed
through multiple premium increases (30% in 2003, 43.8% in
2007, and 85% in 2015) in an attempt to set premiums in line
with its costs. While premium increases of this size are
difficult to absorb for those who are still working, it can be
impossible for retirees on a fixed income to absorb the higher
premiums. Genworth is the largest issuer of private LTC
insurance and it has suffered massive financial losses on the
product in the past year. It has added nearly $1 billion to
the loss reserves for its LTC policies and has had its bonds
reduced to junk status by multiple rating agencies. These
losses are occurring despite Genworth having significantly
increased the premiums charged for its existing policies.
Losses in LTC insurance previously caused both MetLife and
Prudential to exit the market.
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Analysis Prepared by:
Paul Riches / INS. / (916) 319-2086 FN: 0001231