BILL ANALYSIS �
AB 999
Page 1
Date of Hearing: May 4, 2011
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
AB 999 (Yamada) - As Amended: March 31, 2011
SUBJECT : Long-term care insurance
SUMMARY : Modifies the long-term care (LTC) insurance rate
development process. Specifically, this bill :
1)Requires every LTC insurer to post a specimen of each
individual or group policy form it sells on its internet
website.
2)Provides that if the loss ratio calculated pursuant to
existing law produces a ratio that is less than the highest
lifetime expected loss ratio for that policy form in all
previous filings, then premiums must be reduced so that the
loss ratio is equal to or higher than the previously filed
highest loss ratio.
3)Prohibits reliance on asset investment yields as a
justification for rate increases.
4)Requires for both pre- and post-stabilization policies that
loss experience on all of an insurer's policy forms be pooled
for purposes of measuring loss ratios.
5)Limits the approval of rate increases on pre-stabilization
policies to no more than once every five years.
6)Limits the approval of rate increases on post-stabilization
policies to no more than once every ten years.
7)Provides that, notwithstanding any provision of law, the
Insurance Commissioner (IC) may approve rate filings if an
insurer demonstrates that the rates are necessary to protect
the financial condition of the insurer, including avoidance of
further reductions in capital and surplus.
EXISTING LAW :
1)Regulates both the rates and marketing of LTC insurance.
AB 999
Page 2
2)Provides that, for pre-stabilization LTC policies, premiums
are deemed reasonable if there is an expected loss ratio of
60%, provided that this loss ratio increases to 70% for rate
increases filed on or after December 31, 2009.
3)Specifies the criteria that shall be used in evaluating
expected loss ratios.
4)Provides that no rate increase may be implemented without the
prior approval of the IC, based on specified actuarial
criteria.
5)Includes, among the specified actuarial criteria, that the
insurer's actuarial certification include a statement that the
premium rate schedule is sufficient to cover anticipated costs
under moderately adverse experience, and that the rates are
reasonably expected to be sustainable over the life of the
policy form with no future premium increases expected.
FISCAL EFFECT : Undetermined.
COMMENTS :
1)Purpose . According to the author, this bill is intended to
modify the long-term care insurance ratemaking process to
protect consumers from the excessive rate volatility that has
characterized the long-term care insurance market. Despite
the "rate-stabilization" efforts enacted in 2000, and
implemented in 2002 and 2003, insurers have continued to
underestimate the real cost of long-term care insurance, and
consumers who purchase policies they expect to pay premiums on
for many years before needing the coverage have faced
unexpectedly large rate increases. The goal of this bill is
to have long-term care rates more accurately reflect the
actual costs so that consumers will know what they are buying.
The author is concerned that too many consumers become locked
into high-priced policies that they purchased with the
expectation of lower premiums.
2)Background . Long-term care insurance is a relatively new,
albeit very important, insurance product. As life
expectancies have increased, a growing number of people find
the need to have late-in-life long term care services, which
can be very expensive. Thus, an insurance product to help pay
for these expenses has developed. But LTC insurance is
AB 999
Page 3
different in many ways from most other insurance products.
While it is possible that a catastrophic event will result in
LTC needs in the early years of a policy, the general
expectation is that a policyholder will pay premiums for many
years before ever needing to make a claim. The incentive to
pay premiums for many years before needing the insurance is
based on the pricing mechanism that rewards those who purchase
during their relatively younger, healthier years. As people
age, and begin to have health problems, they either face
extremely high premiums or do not qualify at all for this type
of insurance.
The nature of LTC insurance - the expectation that claims will
occur only years in the future - has made predicting what the
claim costs will be very difficult. It is widely accepted
that the insurance industry did a poor job prior to the early
2000's of predicting these costs. There are a number of
factors: increasing life expectancies; life extending
technology; poor assumptions on how many policies would lapse;
and even basic predictions about what nursing home care would
cost. The result was that people who bought LTC insurance
products based on an evaluation of what they could afford
found themselves faced with very sharp and repeated premium
increases as the industry began to see actual costs develop.
The industry and regulators in the late 1990's began to address
these problems by adopting new rate-making rules. These rules
have been termed "rate stabilization." Policies sold
pre-2002-03 are termed "pre-stabilization" policies, and
policies sold since then are termed "post-stabilization"
policies. According to the author and sponsor, the Department
of Insurance (DOI), the post-stabilization reforms have not
worked well, and the same issues that plagued the
pre-stabilization market continue to plague the
post-stabilization market. LTC insurers are not entirely in
agreement with this assessment, noting that most of the rate
increases in recent years have been for pre-stabilization
policies. Nonetheless, the LTC insurance industry has
acknowledged that some changes are needed.
Posting policy forms . The LTC insurers have objected to the
requirement that every policy form be posted on the insurer's
website as impractical and confusing for consumers. In lieu
of this requirement, insurers have suggested posting a
specimen outline of coverage on the DOI's LTC rate comparison
AB 999
Page 4
website, to make it convenient for a consumer to compare both
rates and coverage. The DOI has proposed to adopt this
suggestion, provided that the insurer also post on its website
and provide written notice at the point of solicitation that a
consumer has the right to request, and receive within 15 days,
the actual policy form.
3)Pooling of loss experience . The LTC insurers have objected to
the scope of the pooling requirement. The bill requires the
loss experience on all policies of an insurer and its
affiliates to be pooled together. The industry has agreed in
concept that there should be some pooling of experience, but
proposes that the pooling be done with several different
classifications of similar types of policies. The DOI has
responded that some degree of separate classification is
acceptable, but the industry's proposal goes too far. The DOI
has provided responsive language for the industry to consider.
4)Limitation on reliance on investment returns . The LTC
insurers agree that a limitation on reliance on investment
yield is acceptable, but believe the bill's language is too
broad. Instead, the industry has proposed to modify the
language by limiting application of the prohibition when the
insurer can demonstrate that its returns are lower than
specified criteria, or when the IC determines that a change in
interest rates are justified due to changes in laws or
regulations that are retroactively applicable to LTC insurance
previously sold in this state.
5)Loss ratio limitation . The LTC insurers argue that this new
limitation should apply only prospectively, and that more
detail is required to properly implement this limitation.
They have proposed language to accomplish this goal.
6)5-year/10-year rule . The bill proposes to limit the frequency
of rate increases to once every five years for
pre-stabilization policies, and once every ten years for post
stabilization policies. The purpose of this rule is to
encourage LTC insurers to take care to estimate their expected
costs so that policies are not sold to unsuspecting consumers
at enticing but unrealistically low prices. In this regard,
proponents note that LTC insurers selling post-stabilization
policies are already required to assume, and build into their
rates, that moderately adverse circumstances will prevail in
relation to the actuarial assumptions used to build the rates.
AB 999
Page 5
LTC insurers have objected to this rule, arguing that it is
unrealistic to preclude any rate increases for such a duration
due to the myriad uncertainties that can arise in that time
period. They also argue that, with the prior approval
requirement, the IC already has the tools to prevent
unrealistically low rates. In lieu of this rule, the LTC
insurers have proposed that each insurer have a choice between
a five-year limitation for both pre- and post-stabilization
policies, and complying with an annual actuarial certification
that shows rates are at an appropriate level, and requiring an
action plan in the event the actuarial analysis shows
problems.
7)Amendments in Committee . The author and the LTC insurers are
continuing discussions, and it is anticipated that a number of
the outstanding issues will be resolved by amendments adopted
to address the issues outlined, above.
REGISTERED SUPPORT / OPPOSITION :
Support
AARP
Alzheimer's Association, California Council
American Nurses Association of California (ANA\C) (with
amendments)
California Advocates for Nursing Home Reform (CANHR)
California Alliance for Retired Americans
California Commission on Aging
California Department of Insurance (CDI)
California Health Advocates (CHA)
California Professional Firefighters (CPF)
California School Employees Association, AFL-CIO
California Senior Legislature
Gray Panthers of Sacramento
State (of California) Independent Living Council (SILC)
Opposition
American Council of Life Insurers (ACLI)
America's Health Insurance Plans (AHIP)
Association of California Life and Health Insurance Companies
(ACLHIC)
AB 999
Page 6
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086