BILL ANALYSIS �
AB 999
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 999 (Yamada)
As Amended August 23, 2012
Majority vote
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|ASSEMBLY: |42-33|(June 1, 2011) |SENATE: |21-12|(August 29, |
| | | | | |2012) |
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Original Committee Reference: INS.
SUMMARY : Modifies the long-term care (LTC) insurance rate
development process.
The Senate amendments :
1)Delete the "5-year/10-year" prohibition that would have precluded
an LTC insurer from filing a subsequent rate increase application
after having obtained, after the effective date of the bill, a
rate increase approval.
2)Add language that mandates a premium reduction in the event of a
subsequent rate filing that is made after the LTC insurer has
obtained its initial rates, if the subsequent rate filing shows
that the expected lifetime loss ratio is lower than the expected
lifetime loss ratio reflected in the initial filing.
3)Adopt actuarial criteria, including a requirement that experience
data on all similar LTC forms be aggregated, for purposes of
evaluating a rate increase application.
4)Provide the Insurance Commissioner with discretion to allow a
lower premium increase than actuarially indicated if he or she
determines it is in the interest of California policyholders.
EXISTING LAW :
1)Regulates both the rates and marketing of LTC insurance.
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.
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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 Insurance Commissioner (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.
6)Requires the IC to post an LTC rate comparison page on the
Department of Insurance (DOI) internet Web site.
AS PASSED BY THE ASSEMBLY , this bill:
1)Required every LTC insurer to make available a specimen of each
individual or group policy form it sells.
2)Required the IC to post on the DOI Web site an outline of
coverage for each LTC policy in connection with the rate
comparison page already available on the Web site.
3)Provided 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.
4)Prohibited reliance on asset investment yields as a justification
for rate increases, subject to limited exceptions.
5)Required that loss experience on an insurer's policy forms be
pooled for purposes of measuring loss ratios, as specified.
6)Limited the approval of rate increases on pre-stabilization
policies to no more than once every five years.
7)Limited the approval of rate increases on post-stabilization
policies to no more than once every 10 years.
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8)Provided that, notwithstanding any provision of law, the 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.
COMMENTS : According to the author, this bill is intended to modify
the LTC insurance ratemaking process to protect consumers from the
excessive rate volatility that has characterized the LTC 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 LTC 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 LTC 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.
LTC 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 LTC services, which can
be very expensive. Thus, an insurance product to help pay for
these expenses has developed. But LTC insurance is 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 2000s 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
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premium increases as the industry began to see actual costs
develop.
The industry and regulators in the late 1990s 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, 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,
and are no longer opposed to the bill.
Analysis prepared by : Mark Rakich / INS / (916) 319-2086
FN: 0005805