Reports and references provided by Julia Philips, Actuary, Minnesota Commerce Department, cited in the paper and in Appendices 2. & 4.

Transcription

1 Group Long Term Care Insurance (LTCi): Solutions To The Death Spiral Andrew F. Whitman, Professor, Carlson School of Management University of Minnesota, ARIA Poster Session 08/07/2012 (Full Paper Supporting the ARIA 08/07/2012 Poster Session is at Abstract This paper references premium increases produced by inadequate initial premium, adverse-selection and a potential death spiral for two examples of fully insured group long term care insurance plans: The Minnesota State Public Employee Long Term Care Insurance Program (M-PEL) and the University Minnesota s (UMN) Plans. Possible solutions and impediments to solutions, applicable generally to long term care insurance (LTCi), are described, leading to a conclusion that spiraling premium increases can be addressed for existing group policy holders and for new insureds in a controlled bid process to reduce impediments and to evaluate solutions in the Minnesota market. Acknowledgments This paper is based on four indispensable references: The excellent, comprehensive article: (Courbage, C. (2012), Insurance as a solution to cover long-term care needs, in Patrick M. Liedtke and Kai-Uwe Schanz (eds), Addressing the Challenge of Global Ageing Funding Issues and Insurance Solutions, The Geneva Reports No. 6 June, Geneva: The Geneva Association, Reports and references provided by Julia Philips, Actuary, Minnesota Commerce Department, cited in the paper and in Appendices 2. & 4. The dimensions of the UMN LTCi Plans provided by Karen M. Chapin, UMN Health Program Manager. Description of The State Of Minnesota LTCi Program (M-PEL) with an analysis of adverse selection in The Public Employee Long-Term Care Insurance Program Study, Prepared by Minnesota Management and Budget In accordance with the Laws of 2009, Chapter 159, Section 108, February 1, Limitations All deficiencies, limitations and errors are entirely the responsibility of Andrew Whitman. Many of topics titled in paragraphs of this paper require separate in-depth study. Incorporated in this paper is only Andrew Whitman s review of selected literature and Minnesota statutes. For proper evaluation of each employee group the employee census in needed with the group s experience including loss ratios, lapse rates, etc. on the current group of insureds. A collaborative approach is required for future develop and discussion.

2 Conclusion: Solutions For Minnesota s Public Group Long-Term Care Plans Insurers in Minnesota have had rate filings approved for substantial LTCi rate increases. A filing for Minnesota Group Plans was approved and the UMN benefits department was notified of a 45% rate increase, effect in Transamerica filed for Group LTCi increase of 25%, 04/27/2009. This is only group LTCi rate increase filing found in the MN electronic data from SERFF. Group LTCi is the most promising option to address spiraling premium increases. Employers, employees, insurers and state regulators can evaluate solutions and impediments in a bid process for Minnesota s Public Group Long-term Care, fully insured plans. They can determine the best fit for each group of employees and current LTC insureds. Perhaps Christophe Courbage s statement will ring true in Minnesota, Encouraging group insurance. Group insurance is a good solution to increase the knowledge of LTC insurance and make it accessible at younger ages, than when buying on an individual basis These contracts are substantially cheaper to administer and thus have the potential to increase the number of people covered by private insurance. However, governments need to ensure that employment-based and other group insurance policies are portable and people are not dropped from their policies when their employment ends. Courbage, C. (2012), Insurance as a solution to cover long-term care needs, in Patrick M. Liedtke and Kai-Uwe Schanz (eds), Addressing the Challenge of Global Ageing Funding Issues and Insurance Solutions, The Geneva Reports No. 6 June, Geneva: The Geneva Association, at 94. CONTENTS OF FULL PAPER A Troubled Market: Premium Increases And Insurance Company Withdrawal Minnesota Group LTC Statutes & Selected Definitions Two Minnesota Public Group LTCi Plans 1. University of Minnesota s Long Term Care Insurance Plans (UMNP) 2. State Of Minnesota s LTCi Program (M-PEL) The Minnesota Limited Market Adverse Selection Among Public LTCi Groups In Minnesota Seth J. Chandler s Model to Evaluate Premiums for Long-Term Care Insurance: Anti-selection And The Death Spiral and a Worst Case Scenario Solutions 1. How To Increase Access 2. Other Factors In State and Federal Legislation (The Patient Protection and Affordable Care Act (PPACA) 3. Minnesota Statutes On Raising Awareness And Underwriting of The M-PEL 4. Solutions Based on Group Insurance Underwriting Impediments To Solutions 1. Inadequately Informed Applicants 2. Adverse Selection 3. Moral Hazards 4. Availability of public programs 5. Belief That Medicare Covers 6. Availability of family resources 7. Affordability 8. Intergenerational care givers: 9. Unfair market practices Conclusion: Solutions For Minnesota s Public Group Long-Term Care Plans

3 Appendices 1, 2, 3, & 4. are at Appendix 1. Minnesota Statutes On LTCi Appendix 2. Minnesota LTCi Rate Increase Filings Transamerica s is the only group LTCi rate increase filing found in electronic data from SERFF. Transamerica MN TLIC-LIICA RINC 2007 Group LTC filing 25% increase 04/27/2009, and Lapse Rates v. Industry Society of Actuaries LTCI Intercompany Study Results filing AEGJ public.pdf, 1592K View Download Appendix 3. References Appendix 4. Insurance Companies Selling and Stopped Selling Long- Term Care Insurance in Minnesota in 2008, 2009, 2010 and The Market for Group LTCi and Nationwide information every company s LTC business in (at Whitman research site)

4 Group Long Term Care Insurance (LTCi): Solutions To The Death Spiral Andrew F. Whitman, Professor, Carlson School of Management University of Minnesota, Full Paper Supporting the ARIA 08/07/2012 Poster Session Abstract This paper references premium increases produced by inadequate initial premium, adverse-selection and a potential death spiral for two examples of fully insured group long term care insurance plans: The Minnesota State Public Employee Long Term Care Insurance Program (M-PEL) and the University Minnesota s (UMN) Plans. Possible solutions and impediments to solutions, applicable generally to long term care insurance (LTCi), are described leading to a conclusion that spiraling premium increases can be addressed for existing policy holders and for new insureds in a controlled bid process to reduce impediments and to evaluate solutions in the Minnesota market. Acknowledgments This paper is based on four indispensable references: The excellent, comprehensive article: (Courbage, C. (2012), Insurance as a solution to cover long-term care needs, in Patrick M. Liedtke and Kai-Uwe Schanz (eds), Addressing the Challenge of Global Ageing Funding Issues and Insurance Solutions, The Geneva Reports No. 6 June, Geneva: The Geneva Association, Reports and references provided by Julia Philips, Actuary, Minnesota Commerce Department, cited in the paper and in Appendices 2. & 4. The dimensions of the UMN LTCi Plans provided by Karen M. Chapin, UMN Health Program Manager. Description of The State Of Minnesota LTCi Program (M-PEL) with an analysis of adverse selection in The Public Employee Long-Term Care Insurance Program Study, Prepared by Minnesota Management and Budget In accordance with the Laws of 2009, Chapter 159, Section 108, February 1, Limitations All deficiencies, limitations and errors are entirely the responsibility of Andrew Whitman. Many of topics titled in paragraphs of this paper require separate in-depth study. Incorporated in this paper is only Andrew Whitman s review of selected literature and Minnesota statutes. For proper evaluation of each employee group the employee census in needed with the group s experience including loss ratios, lapse rates, etc. on the current group of insureds. A collaborative approach is required for future develop and discussion. CONTENTS A Troubled Market: Premium Increases And Insurance Company Withdrawal

5 Minnesota Group LTC Statutes & Selected Definitions Two Minnesota Public Group LTCi Plans 1. University of Minnesota s Long Term Care Insurance Plans (UMNP) 2. State Of Minnesota s LTCi Program (M-PEL) The Minnesota Limited Market Adverse Selection Among Public LTCi Groups In Minnesota Seth J. Chandler s Model to Evaluate Premiums for Long-Term Care Insurance: Anti-selection And The Death Spiral and a Worst Case Scenario Solutions 5. How To Increase Access 6. Other Factors In State and Federal Legislation (The Patient Protection and Affordable Care Act (PPACA) 7. Minnesota Statutes On Raising Awareness And Underwriting of The M-PEL 8. Solutions Based on Group Insurance Underwriting Impediments To Solutions 1. Inadequately Informed Applicants 2. Adverse Selection 10. Moral Hazards 11. Availability of public programs 12. Belief That Medicare Covers 13. Availability of family resources 14. Affordability 15. Intergenerational care givers: 16. Unfair market practices Conclusion: Solutions For Minnesota s Public Group Long-Term Care Plans Appendix 1. Minnesota Statutes On LTCi (at Whitman research site) Appendix 2. Minnesota LTCi Rate Increase Filings (at Whitman research site) Transamerica s is the only group LTCi rate increase filing found in electronic data from SERFF. Transamerica MN TLIC-LIICA RINC 2007 Group LTC filing 25% increase 04/27/2009, and Lapse Rates v. Industry Society of Actuaries LTCI Intercompany Study Results filing AEGJ public.pdf 1592K View Download Appendix 3. References (at Whitman research site) whitman/ Appendix 4. Insurance Companies Selling and Stopped Selling Long- Term Care Insurance in Minnesota in 2008, 2009, 2010 and The Market for Group LTCi and Nationwide information every company s LTC business in (at Whitman research site)

6 A Troubled Market: Premium Increases And Insurance Company Withdrawal LTCi markets are characterized by major imperfections such as high transaction costs, information asymmetries, and low competition; insurance premiums are high and coverage is limited. (Articles published in a special issue of the Journal of Risk and Insurance, 2009, Vol. 76, No. 1, 1-4) Brown and Finkelstein estimate that premiums in this market are very high relative to benefits. They estimate that, on average, the typical policy purchased by an average 65-year-old (about the average age of buyers) and held until death has a load of 18 cents. After accounting for individuals who often stop paying premiums the estimated load rises from 18 cents on the dollar to 51 cents on the dollar. This reflects asymmetric information, limited competition, and/or high administrative costs. High premiums can also be linked to expensive benefits. (Articles published in a special issue of the Journal of Risk and Insurance, 2009, Vol. 76, No. 1, 1-4) Over the past decade insurance companies and regulators experienced increasing number of rate increase filings for Long-Term Care Insurance (LTCi) products. Regulators are faced with balancing the rate increase requests of insurance companies and consumers expectations for predictable premiums. Gorman Actuarial (GA) surveyed 30 state insurance regulators processes to identify tools used in reviewing rate filings. GA found significant variation in the ways states address long-term care rate filings. (Prepared for the Massachusetts Division of Insurance, June 30, 2009, Gorman Actuarial, LLC, 210 Robert Road, Marlborough, MA 01752) MA LTCI DOI Report_GA_June_30_09.pdf 1845K View Download Insurers in Minnesota have had rate filings approved for substantial LTCi rate increases. A filing for Minnesota Group Plans was approved, and the UMN benefits department was notified of a 45% rate increase, effect in Transamerica is the only group LTCi rate increase filing found in electronic data from SERFF. MN TLIC-LIICA RINC 2007 Group LTC filing 25% increase 04/27/2009, and Lapse Rates v. Industry Society of Actuaries LTCI Intercompany Study Results filing AEGJ public.pdf 1592K View Download (See Appendix 2 for rate filings at Whitman research site) The number of lnsurers selling LTCi has declined in Minnesota and nationally. (Appendix 4. Shows Companies Selling and Stopped Selling Long-Term Care Insurance in Minnesota Yearend Enrollment in 2008, 2009, 2010) (at Whitman research site) High levels of premiums and thus issues of affordability of LTC insurance products also have been raised as reasons that deter from purchasing LTC insurance. As said before, there is a high uncertainty of the future cost of LTC as well as the probability distribution, and insurers cannot forecast expenditures with any certainty. This has a strong effect on the affordability of these products. Brown and Finkelstein (2007) have presented evidence of supply- side market failures in the U.S. LTC insurance market, such failures being explained by the characteristics and pricing of the products on offer. In practice, policies at an actuarially fair price are unlikely to be offered in the market for LTC insurance. Private insurers protect their companies from uncertainty about the future and

7 the potential for adverse selection by increasing the cost of the premiums. (Noted in Courbage, C. (2012), Insurance as a solution to cover long- term care needs, in Patrick M. Liedtke and Kai- Uwe Schanz (eds), Addressing the Challenge of Global Ageing Funding Issues and Insurance Solutions, The Geneva Reports No. 6 June, Geneva: The Geneva Association, 85-97, at 90. Facing Increased Premium Many individual and group LTC insureds are faced with the decision to pay increased premium to keep the policy or lose the coverage and the prior premiums they paid. Some alternatives to consider before stopping premium payment and losing coverage are: - Shorten the length of the coverage to 3-5 years - average care is near 4 years for women and 2.2 for men (Following Murphy s Law, your experience will be much worse, longer, than the average) - Modify the policy for fewer "bells and whistles" - Reduce the amount of inflation adjustment to benefits. (Cost of care has recently been flat) This option is the most important for the policyholders who elected compound or simple inflation. The premium increase can be completely avoided by reducing the inflation coverage from 5 % compound or simple to a lower percentage which varies by policy series. Policyholders will retain all accrued inflation increase amount to date and the lower inflation index will apply on a prospective basis. Minnesota Group LTC Statutes & Selected Definitions (Appendix 1. at Whitman research site) LONG- TERM CARE INSURANCE: Group insurance Certificates, Minn. Statutes S.01, S.09 Coverage, see same under this topic Electronic enrollment, Minn. Statutes S.181 Evidence of approval, filing, Minn. Statutes S.27 Generally, Minn. Statutes S.17 Issuance, insurers' duties, Minn. Statutes S.29 Nonforfeiture benefits, Minn. Statutes S.266 Premium rate schedule increases, exclusion, Minn. Statutes S.265 MS 62A.46 DEFINITIONS: Subd. 2. Long- term care policy. "Long- term care policy" means an individual or group policy, certificate, subscriber contract, or other evidence of coverage that provides benefits for prescribed long- term care, including nursing facility services or home care services, or both nursing facility services and home care services Subd. 18. Long- term care insurance. "Long- term care insurance" means a qualified long- term care insurance policy or rider advertised, marketed, offered, or designed to provide coverage for not less than 12 consecutive months for each covered person on an expense incurred, indemnity, prepaid, or other basis for one or more necessary or medically necessary diagnostic, preventive, therapeutic, rehabilitative, maintenance, or personal care services, provided in a setting other than an acute care unit of a hospital. Long- term care insurance includes: (1) group and individual annuities and life insurance policies or riders that provide directly or that supplement long- term care insurance; and

8 (2) a policy or rider that provides for payment of benefits based upon cognitive impairment or the loss of functional capacity. "Group long- term care insurance" means a long- term care insurance policy delivered or issued for delivery in this state and issued to: (1) one or more employers or labor organizations, or to a trust or to the trustees of a fund established by one or more employers or labor organizations, or a combination, for employees or former employees, or a combination, or for members or former members, or a combination, of the labor organizations; (2) a professional, trade, or occupational association for its members or former or retired members, or combination, if the association: Subd. 16. Guaranteed renewable. "Guaranteed renewable" means the insured has the right to continue the long- term care insurance in force by the timely payment of premiums and the insurer has no unilateral right to make any change in any provision of the policy or rider while the insurance is in force and cannot decline to renew, except that rates may be revised by the insurer on a class basis. MS 62A.48 Subd. 10. Regulation of premiums and premium increases. Policies issued under sections 62A.46 to 62A.56 on or after January 1, 2002, must comply with sections 62S.021, 62S.081, 62S.265, and 62S.266 to the same extent as policies issued under chapter 62S. Two Minnesota Public Group LTCi Plans 1. University of Minnesota s Long Term Care Insurance Plans (UMNP) 2. State Of Minnesota s LTCi Program (M- PEL) Both the M- PEL (Section 43A.318 Public Employees Group Long- term Care Insurance Program) and the UMN Policies are fully insured LTCi plans, offered as an optional benefit, with guaranteed issue and renewable insurance policies. The employer is the policy owner the employees are issued certificates of insurance. 1. University of Minnesota s Long Term Care Insurance Plans UMN currently has two Group LTCi polices one with CNA since 2003, another with John Hancock since (The following description of UMN plans was provided in an dated May 23, 2012 from Karen M. Chapin, UMN Health Program Manager) ORIGINAL CARRIER CNA Participants Approximately 450 individuals with payroll deductions. Some have spouse coverage as well, and there are some University retirees on direct bill (not included in these numbers). Annual Premium - Approximately $400,000. Policy is original policy transferred from the State in State had done an RFP a few years before that time, and University utilized that RFP. No new entrants have been permitted since April, Rates have not increased and we have no notice of an upcoming rate increase. *CURRENT CARRIER JOHN HANCOCK*

9 Participants Approximately 1300 individuals with payroll deductions. Some have spouse coverage as well, and there are some University retirees on direct bill (not included in these numbers). Annual Premium - Approximately $1,600,000 University Long Term Care RFP completed for April, 2007 effective date; John Hancock recommended as new LTC carrier by RFP committee, and approved by administration and Board of Regents. Open enrollment held as of April 2007 effective date. Participants had option to move completely to John Hancock and transfer reserves if eligible, stay with CNA, or retain some coverage with CNA and add John Hancock coverage. Due to complexity of the coverage, purchasing had approved waiting 7 years before a new RFP, versus our typical 6- year time period. CURRENT SITUATION John Hancock has notified us that we can expect to receive a significant rate increase effective April 1, 2014 (end of 7- year period). The rate increase has now been approved by the State of Minnesota, in an amount that averages 45%. Participants will be given options to reduce benefit coverage and features to mitigate the rate increase. John Hancock has also notified us that they will not accept any new entrants to the LTC program, effective March 1, Current participants will have all of the benefits and rights that the policy allows. GROUP LONG TERM INSURANCE MARKETPLACE Our John Hancock policy and the previous CNA policy are both fully insured, and we have not been able to date to see loss ratios, lapse rates, etc. on our program alone. This was also the case with other LTC carriers that we reviewed during the RFP process. There are currently only two carriers, Genworth and Prudential, that are writing new group Long Term Care Insurance programs and taking new entrants. We will contact CNA to determine if they would be willing to open up our account to new business, although I believe that is unlikely. We had a good discussion with Genworth, and they have made some decisions on pricing, underwriting, and actuarial assumptions. They also have a large block of individual business, and are more reliant on that than group business. We are currently working to decide whether or not it would make sense for the University to continue to offer Long Term Care Insurance or not. The last thing we want is to have three policies that don't allow new entrants. If we decide to proceed with an RFP, we would have an April 1, 2014 effective date. 2. State of Minnesota s LTCi Program (M- PEL) This summary is derived from (The Public Employee Long- Term Care Insurance Program Study, Prepared by Minnesota Management and Budget In accordance with the Laws of 2009, Chapter 159, Section 108,February 1, 2010 Report) The state employee LTCi plan, the Public Employees Group Long- term Care insurance Program (MPEL), is offered to current and former employees, their spouses and parents. This fully insured plan is available to the same group of employers that are eligible for the other SEGIP offerings, including those in all three branches of government, Minnesota State Colleges and Universities (MnSCU) and certain quasi- state agencies such as the Minnesota Historical Society. (The Public Employee Long- Term Care Insurance Program Study, Prepared by Minnesota Management and Budget In accordance with the Laws of 2009, Chapter 159, Section 108, February 1, 2010 Report p.6.)

10 Changes to the M- PEL, plan: May 2000 DOER selected CNA from a field of 12 insurers to underwrite the plan. October 2000 DOER conducted initial enrollment for state employees. Over 11,000 individuals enrolled, 75 percent of which were employees, 22 percent spouses and 3 percent parents. January 2001 Group long- term care insurance program for state employees took effect. May 2001 Enabling law amended to include retirees and their spouses but eliminated employees of local units of government. Laws of 2001, Chapter 94, Section 1. July 2004 Existing members offered opportunity to purchase additional inflation protection. June 2006 M- PEL held an Open Enrollment in which state employees could join without evidence of insurability provided they were actively at work. Eligible spouses and parents could join with evidence of insurability. August 2006 Separate retiree LTCi plan discontinued but future retirees were allowed to participate in M- PEL. Existing retiree members retained their coverage. January 2008 M- PEL converted existing policies to long- term care partnership coverage where allowable. Winter 2010 M- PEL anticipates an Open Enrollment period in which employees can join without proof of eligibility, provided they are actively at work. Retirees, spouses, and parents may join with evidence of insurability. Options for enrollment/conversion to partnership programs will be made available. The Minnesota Limited Market The field of insurance companies issuing LTCi policies has been dwindling. In the past 70 Minnesota Companies, listed in Appendix 4. issued LTCi policies, and for 2008, 2009 and 2010 Total Enrollment increased from 194,208, 195,887 to 199,397. However by 2011 only 13 companies listed below were increasing the number of policies issued, and three of those companies had most of the total market. Only two companies, Genworth with total enrollment of 18,455, and Prudential with total enrollment of 4,619, have expressed an interest in bidding on coverage for UMN employee plans. Some companies are getting out of the business due to the low interest rate environment, rising long term care costs and increased longevity. If a company stops issuing polices and is phasing out of the business, insureds will still be covered. Generally companies will continue to service or transfer insureds to another insurer. Yearend Enrollment Selling in 2011 Stopped Selling NAIC # INSURANCE COMPANY BANKERS LIFE AND CASUALTY COMPANY GENWORTH LIFE INSURANCE COMPANY 8,361 7,850 5,520 Y N/A 18,430 16,747 18,455 Y N/A

11 64211 GUARANTEE TRUST LIFE INSURANCE COMPANY JOHN HANCOCK LIFE INSURANCE COMPANY METROPOLITAN LIFE INSURANCE COMPANY MUTUAL OF OMAHA INSURANCE COMPANY NEW YORK LIFE INSURANCE COMPANY NORTHWESTERN LONG TERM CARE INSURANCE COMPANY PRUDENTIAL INSURANCE COMPANY OF AMERICA STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY TRANSAMERICA LIFE INSURANCE COMPANY UNITED OF OMAHA LIFE INSURANCE COMPANY UNUM LIFE INSURANCE COMPANY OF AMERICA 1,895 2,978 3,195 Y N/A 15,762 17,567 19,551 Y N/A 7,600 7,736 7,733 Y N/A 1,454 1,482 1,501 Y N/A 1,448 1,512 1,546 Y N/A 3,541 4,362 5,496 Y N/A 4,139 4,293 4,619 Y N/A 2,868 2,892 2,954 Y N/A 30,721 29,819 28,817 Y N/A 887 1,113 1,421 Y N/A 10,935 10,868 11,425 Y N/A Total Enrollment 194, , ,397 Policy forms and enrollment are shown below for a few insurance companies. Two have expressed interest in providing Group LTCi to UMN: Genworth Life Ins. Co. and Prudential Ins. Co. of America. Four companies are listed below and with other companies in Appendix 4. Group Long- Term Care Insurance Market in Minnesota: Forms & Enrollment (at Whitman research site. whitman/) Form C Form NAIC # Company Name Enrollment Enrollment Enrollment Enrollment CONTINENTAL CASUALTY CO. 3,311 blank 19,588 19, JOHN HANCOCK LIFE INS. CO. 4,123 17,567 14,501 10, GENWORTH LIFE INS. CO. 22,914 16,747 16,901 14,944

12 68241 PRUDENTIAL INS. CO. AMERICA 0 4,293 3,323 2,971 Adverse Selection Among Public LTCi Groups in Minnesota The effects of adverse selection depend on competition in the local market as noted in the Report (The Public Employee Long-Term Care Insurance Program Study, Prepared by Minnesota Management and Budget, pages 2 & 3. Insureds in one group may elect to join another group of lower risk, lower premium, insureds either in a group or with individual LTCi policies. There are adverse selection concerns raised by allowing new groups to join M-PEL. In the nine years since M-PEL first offered coverage, private sector vendors have marketed LTCi to local units. It is likely that groups wanting coverage and able to afford it have already purchased it. Groups wanting coverage but that have not yet purchased it, are likely to only choose M-PEL if it is more cost effective than other available options. This means the groups likely to join are either equal to or more costly than the existing M-PEL membership. Costs for plans that only attract new members who are more expensive than the current membership are difficult to manage creating a highly unstable program. The report references programs which might reduce adverse selection effects on the M-PEL program; Two other methods of providing local units of government state sponsored LTCi have been identified. (page 3) The establishment of a second pool within M-PEL for local units would eliminate the potentially negative effect on total premium costs for current M-PEL members. The second option is to offer LTCi through the Public Employees Insurance Program, an existing state insurance program for local units of government that already has the required infrastructure. Both of these options will likely result in a program with costs similar to the MuniPool and similar to that identified by M-PEL. All of these options are likely to offer the same fully insured product with the same administrative requirements and so will cost approximately the same. Currently, at least two federal health insurance measures could affect LTCi. One provision will allow LTCi premiums to be paid with pre-tax dollars making the coverage more affordable. The other is the CLASS Act, which provides a federal LTCi program. Both of these programs could result in current LTCi options being more affordable. (The Public Employee Long-Term Care Insurance Program Study, Prepared by Minnesota Management and Budget, pages 2 & 3. An example of the complex market analysis required to evaluate the potential for adverse selection is illustrated by debates on restricting choices of public employees. Public employees in Minnesota (police, teaches, maintenance workers, and other local employees can adversely select to move from their smaller employer plan to a larger Public Employees insurance Program (PEIP), an optional medical, dental and life insurance plan administered by the state and available to local government employees statewide. Under current Minnesota law local government employees and unions do not need their employers permission to join the statewide health insurance program, PELP. A bill vetoed by Governor Mark Dayton would have lessened possible adverse selection by requiring local governments approval before their employees could join the PELP. According to Gov. Dayton the ability for small numbers of employee to join a much larger insurance pool has generated millions of dollars in savings for both the employees and their employers; the ability to join PELP generates more competitive bids by health insurance providers creating a new step in the approval process in ill-advised. Seth J. Chandler s Model to Evaluate Premiums for Long-Term Care Insurance: Actuarial models are available to evaluate the factors underlying premium increases. (See the list of references in Appendix 3. at Whitman research site) The models account for underlying factors or assumptions which affect premium increases: lapse rates, interest rates, claims rates, decisions of current

13 and future group participants, characteristics of the current insurance group, such as individual risk aversion, likelihood of claim payments, health status, and family status. Seth J. Chandler contributed a parameterized model, inspired by S. Haberman and E. Patacco, that applies descriptions of the health of a person "healthy," "LTC", or "dead" measured at discrete time intervals. The model calculates, among other values, the size of the break-even actuarial premium for a group of sample insureds given a user-specified contract and other factors such as expected interest rates and insurer expense loads. It also calculates reserves on long term care policies as they age. (A Health Stories Model of Long-Term Care Insurance hstoriesmodeloflongtermcareinsurance/) Anti-selection And The Death Spiral (Anti-Selection and Adverse Selection refer to the same process) The terms anti-election and the death spiral are applied in economics, finance, insurance, statistics, and risk management. In a death spiral anti-selection has individual's demand for insurance (either the propensity to buy insurance, or the quantity purchased, or both) positively correlated with the individual's risk of loss. Higher risk people buy more insurance, and stay in the pool of insureds, and the insurer does adequately allow for this relationship in the initial price of insurance. Lower risk insureds leave the pool with higher risk people staying in the group. This leads to increasing lapse rates, higher loss ratios, higher premiums, and a death spiral. This adverse selection/death spiral could in theory lead to the collapse of the insured group, which may occur because of private information known only to the insureds (information asymmetry), and because the insurer does not use certain categories of known information to set prices (e.g. the insurer may be prohibited from using information such as gender, ethnic origin, genetic test results, or preexisting medical conditions. The latter is referred to as regulatory adverse selection. (Some information is based on Wikipedia) Insurers apply degrees of underwriting to counter adverse selection of higher risk insureds attempting to obtain insurance and lower risk insureds attempting to leave the group. Insurance law incorporates an 'utmost good faith' or uberrima fides doctrine which requires insurance applicants to answer underwriting questions fully and honestly; if they fail to do this, the insurer may later refuse to pay claims. The death spiral and adverse selection effects have been evaluated for health insurance, pensions, and now LTCi. (See Appendix 3. For references to The Death Spiral below and at Whitman research site) The insurance death spiral is here (The Economist 19, 2010) illustrating calculations of adverse selection effects, the so- called insurance death spiral. Individual Long Term Care Market Indiana Health Insurance... long- term- care- market/, Apr 10, 2012 Insurance companies are unable to predict the long term cost of... looks like the Individual Long Term Care market is already in a death spiral. Worst Case Scenario The worst case scenario is a death spiral during which insureds must pay increasing premiums to continue as insureds and coverage lapses for those who stop paying increasing premium. The insured group becomes a run- off book of business and/or the insurer becomes insolvent and the few remaining policy holder claimants could

14 be paid under the terms of the MN Life and Health insurance Guarantee fund, which limits payment to $500,000 per claimant. A legal remedy for insureds who stopped paying increasingly higher premiums is uncertain. Solutions 1. How To Increase Access Solutions are described in Courbage, C. (2012), Insurance as a solution to cover long- term care needs, in Patrick M. Liedtke and Kai- Uwe Schanz (eds), Addressing the Challenge of Global Ageing Funding Issues and Insurance Solutions, The Geneva Reports No. 6 June, Geneva: The Geneva Association, at How to increase access to LTC insurance? To address the relatively low development of the market for LTC insurance, a number of proposals have been discussed to expand and make this market more accessible. Here are a few suggestions. Combining LTC insurance and life insurance In recent years, new products have been developed to cover the risk of dependency, and in particular a combination of LTC insurance and life insurance into a single product. Combination policies combine LTCi as a rider with an annuity or life insurance product. Typically, traditional policies provide more care for the dollar of premium but combination policies eliminate the fear that if no, or little care is needed, their premiums are not lost. The longevity risk is usually covered through life insurance, while the risk of using LTC is covered by LTC insurance. The strategy of combining these two products in one is that risks compensate each other: healthy people with high life expectancy attracted by life insurance offset those in poor health with a short life expectancy attracted by LTC insurance. Combining these two risks in one product has two further advantages. Firstly, it reduces the phenomenon of adverse selection in the market for life insurance, since dependent people should not live long enough to qualify for long-term annuities. Secondly, the selection of risk is minimized because it consists only of filtering out individuals who can immediately benefit from insurance payments. A study by Murtaugh et al. (2001) shows that combining life insurance with LTC coverage was likely to reduce the cost of both products as well as make them more accessible to potential buyers. In particular, their model shows that under a minimum risk selection, excluding those who would be eligible to receive payments on the date of purchase, 98 per cent of 65 year-old applicants would be accepted compared with 77 per cent under current LTC insurance underwriting conditions. These contracts are available in France and Italy. Individuals who take more care of their health are relatively high risk for the annuities pool and relatively low risk for the long-term care insurance pool. David C. Webb finds that in the presence of administration costs the more risk-averse individuals may buy relatively more long-term care insurance and more annuity coverage. Under the same assumptions, we show that equilibria exist with bundled contracts that Pareto dominate the outcomes with stand-alone contracts, and are robust to competition from stand-alone contracts. The remaining empirical puzzle is to explain why bundled contracts are such a small share of the voluntary annuity market.

15 (David C. Webb, The Journal of Risk and Insurance, Vol. 76, No. 1, Special Issue on Long-Term Care Insurance and Health Insurance (Mar., 2009), pp ; Asymmetric Information, Long-Term Care Insurance, and Annuities: The Case for Bundled Contracts) Combining LTC insurance with reverse mortgages (Continuing with paragraphs from Courbage, C. (2012)) For some time, financial institutions have been offering a product known as reverse mortgage, which resembles the notion of viager in France. A reverse mortgage is a loan secured on the value of a property. This type of loan enables to make liquid or to monetise real estate assets without any transfer of ownership. If necessary, the sale of the property at a later date enables the reimbursement of the loan. As few elderly seem to use reverse mortgages to supplement income during retirement, this tool could be used to finance LTC. This concept seems to appeal primarily when it is directly linked to LTC expenses. For instance, the recent report of the French authorities on the creation of the fifth risk for social security suggests that people whose wealth exceeds a certain threshold will have to pledge part of their inheritance to receive the full rate of public help in case of dependency. Chen (2001) suggests going further by linking the reverse mortgage, not to LTC spending, but to either life or LTC insurance. The idea is that the reverse mortgage would be used to pay insurance premiums and not LTC. One solution would be to link the annuity to be received to the value of the house and to the level of dependency. The property would act as a safety net and would be used as financing of last resort. Of course, a limit to this solution is that this source of income is available only to property owners. 1 For a comprehensive proposal related to the U.S. market, see Feder, Komisar and Friedland (2007). 93 Combining insurance and private savings Another way that would make insurance coverage more accessible would be to allow and/or force individuals to save during their worktime period in order to pay for either their LTC expenses later in life or their LTC insurance premium. This would spread the cost of insurance over time and allow for one generation to accumulate sufficient resources to take care (partially) of its own needs in LTC through individual savings accounts. These savings accounts could take the form of health savings accounts that already exist in Singapore, China or the U.S., where savings are invested in a special account to cover only health care spending. These accounts are generally offered in combination with a high deductible insurance. Various possibilities exist, whether in the form of voluntary participation with financial incentives, or of mandatory contribution with additional contribution from the employer. These savings accounts could also take the form of the Swiss second pillar, the mandatory occupational pensions system. The funds of the second pillar are already being used to expand home ownership. They could also be used to expand access to insurance. Such a system, based on intertemporal distribution mechanisms, enables building up reserves for old age and makes it possible to fight against moral hazard. However, such accounts do not enable risk-sharing between individuals and depend on the performance of financial markets. Additionally, they can segment the pool of insureds further and make LTC risks more difficult to insure. Anticipating the risk of dependence early enough the Eldershield experience Insurance products covering the risk of dependency have a relatively low penetration rate compared with other insurance products. One reason is that relatively few people are aware of this risk and the existence of such insurance products. Another reason is

16 that insurance becomes an expensive solution when it is contracted at a later age. Indeed, since it is important to provision this risk (transfer of risk over time rather than between individuals), insurance is more interesting when it is contracted early. With this in mind, the Singapore authorities have introduced a new public financing system of dependency risk, entitled Eldershield. From the age of 40, all individuals are automatically enrolled in this system and randomly allocated to an insurer, although they are free to choose another insurer among the insurers authorized to participate in the system. It is also possible to refuse membership to the system in the first three months. In this case, it is not possible to take advantage of the benefits of the system (no public subsidies and preferential underwriting conditions). The product and its pricing are to be borne by insurers. The premium is paid until the age of 65 and compensation in case of dependency is for life. Possibility of surplus redistribution and premium discounts is also included. The plan was launched in The government funded a portion of the premium in order to smooth age segmentation. It also provided means-tested benefits for those already dependent. A large information campaign was conducted to promote the plan and its products. The optout rate of the plan decreased from 38 per cent in 2002 to 14 per cent in 2006, reflecting the importance of guiding people and of raising awareness of the risk of dependency. Promotion of LTC insurance by the public sector The public sector can promote the development of LTC insurance from both the demand and supply sides. On the demand side, the government can offer tax relief on both LTC expenditure and LTC insurance premiums. Individuals can deduct a portion of their LTC expenses, including premium of their gross income. This can take the form of either tax deductions or tax credits. Of course the effect should strongly depend on the level of price elasticity. In the same way, the government could subsidize premiums for low-income subscribers as is the case for private health insurance in various countries. The government can act also indirectly by raising awareness about the risk of needing LTC in the future. For instance, in France, it seems that national debates associated with the search for new solutions to cover the risk of LTC need, widely covered in the press, have increased the general public s awareness of the existence of this risk. Since people are getting more aware of the LTC risk, they also become more concerned about its financing and coverage. This has supported the development of the private insurance as stressed by Durand and Taleyson (2003). The new federal Community Living Assistance Services and Support Act (CLASS Act) in the U.S. should also be an illustration of these phenomena as the Federal Government will spend millions of dollars to raise the awareness that people need to plan for LTC. This will undeniably contribute to inform people about the role of insurance in protecting against LTC risks. Encouraging group insurance Group insurance is a good solution to increase the knowledge of LTC insurance and make it accessible at younger ages, than when buying on an individual basis. Group insurance does not face underwriting and anti-selection issues. These contracts are substantially cheaper to administer and thus have the potential to increase the number of people covered by private insurance. However, governments need to ensure that employment-based and other group insurance policies are portable and people are not dropped from their policies when their employment ends. Courbage, C. (2012), Insurance as a solution to cover long-term care needs, in Patrick M. Liedtke and Kai-Uwe Schanz (eds), Addressing the Challenge of Global Ageing Funding Issues and Insurance Solutions, The Geneva Reports No. 6 June, Geneva: The Geneva Association, at 94.

17 Buying into a Retirement Community Continuing Care Retirement Communities are becoming more popular. They generally combine independent living, assisted living and nursing care in a campus type environment. These often require a large "buy in" and monthly payments. Many offer Alzheimer's and dementia care. 2. Other Factors In State and Federal Legislation: Some of the following factors are referenced in (The Public Employee Long-Term Care Insurance Program Study, Prepared by Minnesota Management and Budget In accordance with the Laws of 2009, Chapter 159, Section 108, February 1, 2010 Report) and Impact the implementation of The Patient Protection and Affordable Care Act (PPACA). Policy Options can build on current programs Increase tax incentives for purchase Improve consumer protections boost consumer confidence Revision and expand Partnership policies Expand ADRC/MFP models Expand PACE buy-in options More support for informal caregivers Revise CLASS statute to create viable LTC Allow Medicaid buy-in for higher earners Mandatory public LTC option Tax credits for caregivers Medicare Part E Minnesota Statutes On Raising Awareness and Underwriting of the M- PEL (c) The commissioner shall promote activities that attempt to raise awareness of the need for long- term care insurance among residents of the state and encourage the increased prevalence of long- term care coverage. These activities must include the sharing of knowledge gained in the development of the program. (d) The commissioner may employ and contract with persons and other entities to perform the duties under this section and may determine their duties and compensation consistent with this chapter. (e) The benefits provided under this section are not terms and conditions of employment as defined under section 179A.03, subdivision 19, and are not subject to collective bargaining. (f) The commissioner shall establish underwriting criteria for entry of all eligible persons into the program. Eligible persons who would be immediately eligible for benefits may not enroll. (g) Eligible persons who meet underwriting criteria may enroll in the program upon hiring and at other times established by the commissioner. (h) An eligible person enrolled in the program may continue to participate in the program even if an event, such as termination of employment, changes the person's employment status. (i) Participating public employee pension plans and public employers may provide automatic pension or payroll deduction for payment of long- term care insurance premiums to qualified vendors contracted with under this section. (j) The premium charged to program enrollees must include an administrative fee to cover all program expenses incurred in addition to the cost of coverage. All fees collected are appropriated to the commissioner for the purpose of administrating the program. Subd. 5.Private sources. This section does not prohibit or limit individuals or local governments from purchasing long- term care insurance through other private sources.

18 3. Solutions Based on Group Insurance Underwriting (Minnesota Statutes on Group LTCi require some of the following underwriting safeguards see Appendix 1. Minnesota Statutes on LTCi at Whitman research site). Group underwriting is a standard topic, for example in see Kenneth Back, Jr. and Harold D. Skipper, Jr. Life & Health Insurance, 13 th Ed. Chapter 18. Group Insurance, page 450, on which some of this discussion is based. An objective of group underwriting is to obtain a group of insureds with a more predictable premium level. The group becomes a unit of underwriting and insurance principle can be applied to the group. The following group insurance underwriting safe-guards tend to reduce adverse selection and administration costs: Insurance incidental to formation of the group Large group of employees and minimum participation by the group: If all eligible persons are enrolled this can substantially reduce adverse selection. In smaller plans more restrictive underwriting is required to reduce adverse selection, including less liberal policy provisions, some health status underwriting, and full underwriting of late entrants and dependents. Third party sharing the cost: The employer, the government, union or trade association, insurance company, and other party may share the cost, sharing premium increases among employers, government (direct or indirect subsidies such as tax reduction), across groups insureds (might include new and existing insureds) Combining LTCi with life insurance (group or individual), savings (individual or group retirement plans), reverse mortgages, or forms of annuities. Group LTCi is paid entirely by the employee as an optional benefit. However, a noncontributory employer-pay-all-plan, like many group life insurance plans is simple and gives the employers control over the plan, reduces administrative costs, avoids the difficulties of enrolling a sufficient number of employees, and avoids some the problems of distributing cost among employee classes. Limit enrollment to hiring and open enrollment periods, and apply longer waiting periods. This reduces the effects of guaranteed issue products, limiting eligibility time to a number of days after being hired and by managing open enrollment periods. Flow of insureds through the group with an influx of new insureds and an outflow of older high risk insureds. Although it is difficult to apply to LTCi, it is accomplished to a degree with group life insurance by reducing benefits at higher ages and by permitting conversion to higher premium individual policies when employees leave the group. Conversion and a decree of portability are available in group life and health insurance. Fixed benefits package: Group underwriting offers a fixed benefit package to all enrollees. The amount of benefits is beyond the control of the enrollees. Those in poor health or higher risk cannot select against the insurer, healthier low risk people cannot elect minimum coverage. Efficient Administrative organization: Sponsoring organizations, the employer, union, or association as a single administrative unit can act of behalf of the insured group. Premium classes might be based on employee age or family unit The process of transitioning employees to individual conversion policies when leaving the group