GENERAL INSURANCE ANNUAL REPORT, 1998

GENERAL INSURANCE ANNUAL REPORT, 1998

CONTENTS Introduction... 3 Elementary Insurance (Property and Liability)... 3 Financial Insurance... 3 Health Insurance... 4 Compulsory Motor-Vehicle Insurance Reform... 5 A. Current Operating Methods in Compulsory Motor-Vehicle Insurance... 5 B. The Managed Competition Model... 7 Insurers Modus Operandi vis-a-vis Service Providers... 11 A. Insurers Working Methods vis-a-vis Plumbers... 11 B. Motor-Vehicle Anti-Theft Requirements... 12 C. Insurers Working Methods vis-a-vis Motor-Vehicle Adjusters... 13 Health Insurance... 14 A. Levels of Health Insurance... 14 B. Long-Term Care Insurance... 18 Tables Table D-1 Rate Changes during the Transition Period... 9 Table D-2 Comparison of Health Funds Supplemental Health Coverage with Insurance Companies Coverage... 16 Figures Figure D-1 Types of Health Insurance... 16

The General Insurance Department deals with matters related to non-life insurance lines in four main fields, property, liability, financial, and health. The Department is active in issuing insurance companies with various authorizations to enforce existing policy, formualting new regulatory policy or updating existing policy (as the case may be), and applying policy by issuing regulatory circulars and directives. The policy considerations are based on the need to assure the well-being of the insured, in both the short and the long terms, with emphasis on creating a sound market structure that will facilitate competition, and, in particular, by monitoring the market. ELEMENTARY INSURANCE (PROPERTY AND LIABILITY) The Department monitors personal and commercial insurance lines, in both property and liability. It focuses mainly on personal insurance because the public is highly sensitive to it and due to the need to safeguard the interests of individual insured vis-a-vis insurance companies. The Department devotes much activity to compulsory motor-vehicle insurance in view of the ongoing reform of this line of business under the Motor-Vehicle Insurance (Insurance under Conditions of Managed Competition and Transitional Arrangements) Law, 5757-1997. As part of this reform, the rates were amended four times in 1998 1999. As a result of the changes, premiums decreased by 22 percent and cross-subsidization among different types of motor vehicles was reduced, in order to charge the insured public more appropriate premiums. Notably, the Department also regulates insurers activity in regard to working relations with various service providers (plumbers, installers of automobile alarms and anti-theft devices, etc.) and claims adjusters, in order to establish appropriate criteria for these activities and to safeguard the interests of the individual insured. FINANCIAL INSURANCE The Department regulates and monitors activity in financial insurance lines, including various kinds of credit insurance, foreign trade risk insurance, guarantee insurance under the Sales (Dwellings) (Assurance of Homebuyers Investments) Law, 5735-1974, title insurance, and mortgage guarantees. Many of the Department s areas of activity are new in the Israeli

market; they pertain to private customers and interface with the banking system. Accordingly, they require comprehensive regulation similar to that in other countries. At the current writing, the Division is well along in setting conditions for activity in respective to guarantees. HEALTH INSURANCE The Department regulates health-insurance activity and monitors activity in personal accident, illness, and hospitalization insurance. Regulation in these fields is extremely complex because of the vast range of policies offered and the public s strong sensitivity to personal insurance pertaining to individuals health. This sector entails complex regulation, including the creation of coordination mechanisms between government entities and corresponding regulators at the Health Ministry and the Budget Division of the Finance Ministry. Furthermore, systemization is needed, sometimes at the level of individual policies, including setting of minimum standards and extra monitoring of insurance companies solvency.

A. CURRENT OPERATING METHODS IN COMPULSORY MOTOR-VEHICLE INSURANCE COMPENSATION FOR TRAFFIC ACCIDENT CASUALTIES LAW The Compensation for Traffic Accident Casualties Law, 5735-1975 (hereinafter: the Compensation Law) stipulates the insurance coverage in motor-vehicle insurance policies that became compulsory under the provisions of the Motor-Vehicle Insurance Ordinance (New Version), 5730-1970 (hereinafter: the Ordinance). The main principles of this legislation are: 1. Total liability a traffic-accident casualty s entitlement to compensation is absolute (Paragraph 2 of the Compensation Law). 2. No-fault compensation is given irrespective of the need to prove fault under any other tort law (Paragraph 2 of the Compensation Law). 3. Single-instance stipulation a person who, due to a traffic accident, has reason to file a claim under the Compensation Law may not sue for bodily damage (Paragraph 8 of the Compensation Law). 4. Immediate payment the casualty is entitled to immediate compensation for essential expenses even as his/her case is being settled (Paragraph 5 of the Compensation Law and Regulations to the Compensation Law [Immediate Payments]). 5. Compulsory Insurance insurance for bodily damage resulting from a traffic accident is compulsory (Paragraph 2 of the Ordinance). 6. Karnit Traffic Accident Casualty Compensation Fund established to compensate accident casualties in cases where no insurance policy exists. Karnit, a statutory corporation, compensates casualties who are eligible for compensation under the Compensation Law but cannot sue an insurer for compensation for defined reasons (Paragraphs 10 15 of the Compensation Law and Regulations to the Compensation Law [Financing of the Fund]).

7. Maximum compensation maximum levels have been set for compensation for loss of wages (up to three times the national average wage) and for nonfinancial damage (Paragraph 4 of the Compensation Law). 8. Standard premium rate the Compensation for Traffic Accident Casualty (Level of Premiums) Regulations sets a level of premium that is binding on every insurer in the industry. This principle is expected to change on January 1, 2000, as we explain below. 9. Balanced books the premiums were set at a level meant to keep industry-wide revenues and expenditures in balance. (This principle, too, is expected to change at the beginning of 2000.) 10. Dictating the terms of insurance and coverage the terms of insurance and coverage are enshrined in legislation (the Compensation Law and the Ordinance). AVNER, LTD. At the time the Compensation Law went into effect, due to the uncertainty concerning the level of risk that the law would impose on the industry, Avner Association for Motor Vehicle Casualty Insurance, Ltd. (hereinafter: Avner) was established. Avner is a private corporation owned by the insurance companies at large, each commensurate with its share in the line of business, as is determined from time to time. Avner was formed to reduce individual insurers risks and to transfer some of the risks to a central agency. Practically speaking, Avner serves the insurance companies as a reinsurer of sorts. Avner and each insurance company concluded a five-year agreement that was renewed automatically in the absence of written notice of cancellation. The agreement regulated the apportionment of insurance risk in the line of business. Before the Motor Vehicle Insurance (Insurance under Conditions of Managed Competition and Transitional Arrangements) Law, 5757-1997 (hereinafter: the Conditions of Controlled Compensation Law), went into effect, the insurance was divided at a ratio of 30 percent for the insurance companies and 70 percent for Avner. The Conditions of Managed Competition Law adopted this arrangement for an interim period, reapportioned liability between the insurers and Avner at 50 percent for each side, and determined that this ratio would remain in effect until the industry s transition to competitive structure is completed on January 1, 2000.

KARNIT Karnit Traffic Accident Casualty Compensation Fund is a corporation established under the Compensation Law. Its function is to compensate casualties who are eligible for compensation under the Compensation Law but cannot sue an insurer for compensation for any of the following reasons (see also Paragraph 12 of the Compensation Law): 1. The identity of driver liable for the compensation is not known. 2. The driver does not carry insurance under the Motor Vehicle Ordinance or his/her insurance does not cover the liability at issue. 3. The insurer is in receivership or has been placed under a licensed manager. The fund is financed by means of a provision at a stipulated rate (currently 5.15 percent) of insurance premiums remitted by the public for this line of business. (See Paragraph 15 of the Compensation Law.) THE POOL The Israeli Motor-Vehicle Insurance Pool (hereinafter: the Pool) functions as a department that facilitates coverage on a co-insurance basis to insure vehicles that other insurance companies have rejected. The Pool operates in accordance with a set of statutes that constitutes a contract among all insurers who participate in this co-insurance. The share of the insurance companies (including Avner) in this coverage is recalculated for each underwriting year, commensurate with each company s share in this line in the preceding year. The pool is managed by a large insurance agency that operates under the auspices of Avner. According to the regulations concerning insurance rates, the premium charged by the Pool is 25 percent higher the standard rate stipulated in the regulations. B. MANAGED-COMPETITION MODEL In early 1996, several insurance companies expressed an interest in terminating their membership in Avner. In the course of 1997, in view of this notice and in concern that the companies disengagement from Avner would destabilize the industry, the Commissioner of Insurance made a comprehensive inquiry about the desired operating arrangements for the industry.

In light of the recommendations, a model known as managed competition was chosen as the most appropriate for the industry. Its main attributes are: a. Avoidance of a binding uniform rate based solely on type and engine displacement of motor vehicles (as the rate regulations stipulate today); b. A changeover to a situation in which insurance companies will assume the full insurance risk and set the rate accordingly. In the new model, the level of rates will be managed by fixing the Pool rates, which will serve as effective ceilings for market rates. The Pool rates will assure reasonable availability of insurance for the public and keep the proportion of uninsured drivers to a minimum. CONDITIONS OF MANAGED COMPETITION LAW In view of concern about the solvency of the industry and the decision concerning changes in the future, the Knesset on July 30, 1997, passed the Motor-Vehicle Insurance (Insurance under Conditions of Managed Competition and Transitional Arrangements) Law, 5757-1997. The law conditions the licensing of an insurer to write compulsory motor-vehicle insurance, under Paragraph 7 of the Ordinance, on its having been a party to agreements between the insurance companies and Avner, and between each of them and the Pool, as these agreements existed shortly before the law went into effect, except for regular changes therein. The law states that the transition to the new operating model shall be made gradually, over a period of time during which the industry shall make appropriate preparations in various respects, in order to assure the solvency of the industry and the collective well-being of the insured in a reasonable, fair, and proper manner. To attain this goal, the law states among other changes that on January 1, 1998, the apportionment of responsibility between Avner and each insurance company shall be equal, i.e., 50 percent on each side, and from 2000 on each company will meet all liabilities stemming from the coverage. Additionally, the insurance companies and the regulators shall make preparations for the introduction of managed competition before the uniform rate (except for the Pool rate) is eliminated. The purpose in abolishing the dictated-rate method is to improve the correlation between each individual insurer s exposure and the rate it charges, thereby affecting its solvency.

PREPARATIONS FOR THE REFORM During the transition period, the Finance Ministry took various preliminary actions to implement the compulsory motor-vehicle insurance reform. Several of these actions are described below: a. Adjustment of Premiums As part of the compulsory motor-vehicle insurance reform, it was decided to abolish the uniform rate in this insurance line and to introduce managed competition among insurance companies. On July 1, 1999, the compulsory motor-vehicle insurance rate was lowered by 5 percent as an additional interim measure toward a better correspondence between the current rate and the estimated level of actuarial risk in this industry. One purpose of this measure was to assure more accurate insurance rates in advance of the changeover to the managed-competition model in 2000. Table D-1 Rate Changes during the Transition Period Date Decrease in rate (percent) Notes January 1, 1998 Across-the-board reduction in current premium and level of past losses. Mitigation of cross-subsidies among types of insurance September 1, 1998 Total elimination of past losses. Competitivization of various components of the rate. July 1, 1999 Across-the-board reduction in view of earnings at the industry level. April 1, 1999 Update and refinement of rate for activity in train. b. Regulations In August 1999, draft regulations for implementation of the reform were circulated for review by insurance companies and the public. The draft regulations included provisions concerning the operating framework of the information database to be established for this line of

business, a new regulatory method (File and Use) for control of rates, and the pool arrangement and a mechanism for determining and adjusting the rates. c. Establishment of Database Under a provision of the law and in advance of the structural changes in the compulsory motor-vehicle insurance industry, actions were taken to establish an information database in which risk data at the industry level would be gathered for several purposes: analysis, processing, and, in the main estimation of the premium for the pure risk in the industry and recommended rates for the pool. Another purpose of the database is to help companies, the Commissioner, and the public, among others, in pricing the pure risk associated with compulsory motor-vehicle insurance, as stated, by means of various relevant parameters. These figures will allow companies to apply accurate pricing for rates as well as recommendations for the Pool rates. d. Information Audit at the Companies In the course of preparing for the reform and, in particular, for the formation and the efficient and sound performance of the aforementioned database, it became necessary (among other things) to perform a comprehensive audit of the insurance companies information systems and to assess the extent of the companies preparedness for the expected changes. Accordingly, an industry-wide audit was conducted, examining all insurers and quality, availability, and completeness of the data in their possession. As this was done, the companies information-management processes were also examined. The audit report shows that the existing information-system infrastructure suffices for the creation of a central information database. e. Actuarial Examination The Commissioner of Insurance appointed actuaries who specialize in elementary insurance to perform a comprehensive examination of compulsory motor-vehicle insurance rates. Once the examination is completed, adjusted rates will be forthcoming. f. Reserves In 1999, the companies received directives instructing them to reinforce their reserves and encouraging the use of actuarial models.

A. INSURERS WORKING METHODS VIS-A-VIS PLUMBERS After a thorough examination of insurers working methods in providing coverage for damage under homeowners policies by plumbing services, handling of complaints from the public to the Office of the Commissioner of Insurance in this issue, and a ruling by the High Court of Justice (HCJ 7599/9 the plumbers case ), in which the justices ordered the Commissioner to work out an arrangement in this matter, the Commissioner sent the insurers a circular defining their activity in this respect. The arrangement went into effect on July 1, 1999. Its principles include the following: 1. As a matter of principle, the insured should be given flexibility in choosing a service provider to repair damage resulting from an insurance event. This position reflects fair business practice and does not clash with the insurer s legitimate interests. 2. The insured should be allowed to buy a policy that entitles him/her to choose any service provider when an insurance event occurs. 3. Outside plumbers should be allowed to compete with plumbing companies that have relations with an insurance company, in order to motivate service providers sent by insurance companies to provide good, fair, and worthy service for the insured. Main Provisions of the Circular When insurance is being offered, the insurer must allow the insured to buy a policy that entitles him/her to choose any plumber upon the occurrence of an insurance event. This right of choice should be explicitly stipulated in the policy offered (hereinafter: an expanded policy ). However, the insurer is entitled to offer the insured a policy that does not permit choice among service providers (hereinafter: a limited policy ) under certain restrictions. These restrictions include, but are not limited to, separate signing of the insurance offer form in which the insured confirms his/her awareness that the right to choose a plumber is restricted and that, notwithstanding this, he/she is interested in the limited policy. If the sides

concluded an insurance transaction without the signature of the insured as aforesaid, the policy binding upon the parties to the transaction shall be the expanded policy. B. MOTOR-VEHICLE ANTI-THEFT REQUIREMENTS The insurance companies, at their discretion and as part of their underwriting criteria, refuse to issue insurance contracts unless the motor vehicle is equipped with various anti-theft devices. This demand is acceptable and legitimate. However, the Office of the Commissioner of Insurance has received complaints about the occasional practice of insurance companies conditioning the issuance of insurance contracts (or payment of insurance proceedings after an insurance event) on the existence of anti-theft systems of a certain kind or the installation of such systems by a certain installer. In Civil Case 1644/97, Association of Automobile Stereo and Alarm-System Installers in Israel vs. Eliahu Insurance Company, Ltd., the court addressed this matter and stated that insurance companies are entitled to condition the insurance on the installation of an anti-theft system of a certain type. We have adopted the court s approach, which corresponds with our own view. After examining the matter of stipulating a particular installer for anti-theft devices in various respects, our stance is that the insurer may not insist that the insured install anti-theft devices through one particular service provider only. However, we do not believe our intervention is needed when insurance companies refer the insured to a list of installers comprised of a reasonable number of installers who are distributed geographically in an appropriate manner. The insurance companies have an interest in professional installation of anti-theft devices. An insurer who allows its insured to turn to unprofessional and unskilled installers may suffer damage on this account. Accordingly, we believe that an insurer has a material interest in assuring the efficiency of the installation. To make sure that the insurer s interest is confined solely to the quality of installation, it is neither reasonable nor proper that insurance companies or agents obtain a commission, wage, participation in expenses, or any other benefit, directly or indirectly, for the installation of anti-theft systems or from the suppliers of such systems. Additionally, insurers should price all related costs through the premium mechanism only. If an insurer receives a commission from an installer or supplier of anti-theft systems, it is, practically speaking, receiving a supplemental premium, albeit indirect. Such a premium, camouflaged from the insured, impairs competition.

In the light of these principles, on March 15, 1999, the Commissioner of Insurance sent a circular to the managers of the insurance companies, of which the main points follow: 1. Insurers shall not require an insured to install anti-theft devices by means of one particular service provider; instead, they shall allow an insured to choose a supplier from a list comprised of installers who are distributed geographically in an appropriate manner. In the absence of such a list, the insured may choose any other installer. 2. Neither an insurer nor an insurance agent shall receive a commission, wage, participation in expenses, a share of earnings, or any other benefit, directly or indirectly, from an installer or supplier of an anti-theft system. C. INSURERS WORKING METHODS VIS-A-VIS MOTOR-VEHICLE ADJUSTERS Some insurance companies employ their own adjusters ( in-house adjusters ) to assess damage to insured property due to an insurance event. The underlying assumption is that all insurance adjusters operate professionally, objectively, reliably, and honestly. Our assumption in this vein is also based on the legal stipulation that requires insurance adjusters to operate reliably and objectively (Paragraph 12 of the Control of Commodities and Services (Motor-Vehicle Adjusters) Order, 5740-1980, and Paragraph 3 of the Control of Commodities and Services Law, 5718-1957). However, there is concern, at least at the prima facie level, that the fact of an in-house adjuster s being an employee of the insurer may result in a biased opinion in favor of the insurer. The High Court of Justice has taken up this issue but has not yet handed down a decision. To regulate this matter, on March 16, 1999, the Commissioner sent Draft Circular No. 2 to the managers of the insurance companies. Its main provision is the creation of mechanisms to appeal in-house adjusters decisions. The circular requires insurance companies, among other things, to present the insured with a damage estimate before the motor vehicle is repaired so that the insured can appeal the decision. The insured may choose one of two appeal methods: obtaining an opinion from an independent adjuster of his/her choosing or choosing an adjuster from a appeals list, including outside adjusters, that the company gives the insured at the time an insurance policy is issued or renewed.

A. LEVELS OF HEALTH INSURANCE Two of the perceptible effects of the State Health Insurance Law, which went into effect in January 1995, are the development of a private health-insurance market and its transformation into a dynamic market that provides new and diverse products that are in steadily rising public demand. There are various levels of health insurance, differentiated by service providers and insurers: 1. Health funds - provide a basic level of services by force of the law. 2. Insurance companies - provide supplemental levels of service relative to the basic services private health insurance and provide, as the sole providers, long-term care insurance. 3. Supplemental layers - both health funds and insurers provide supplemental and alternative levels of service to the basic services, such as organ transplants at higher limits, choice of surgeon, and complementary medicine. The characteristics of the coverage provided by these institutions are described below: BASIC LEVEL The State Health Insurance Law allows an insured to join the health fund of his/her choosing, in contrast to the previous situation, in which the fund chose the insured. The main importance of the law lies in universal coverage every resident is entitled to health services and the creation of a basic package ( basket ) of health services that health funds must provide. The law also stipulates that the health services in the package must be provided in Israel, on the basis of medical considerations, at a reasonable level of quality, within a reasonable period of time, and at a reasonable distance from the insured s place of residence, all of which within the limits of the funding sources available to the health funds, as the state retains responsibility for funding the services in the package.

SUPPLEMENTAL LEVELS OF HEALTH INSURANCE Since the public health system provides only the services in the basket, consumers who are interested in extra services such as the possibility of choosing one s own surgeon, additional availability and convenience, and full coverage of expenses for treatment in Israel and abroad must acquire them separately by obtaining supplemental insurance from their health fund or from an insurance company. Supplemental insurance has several characteristics that purchasers of health insurance should take into account: 1. It is not compulsory, unlike the basic package of health services, which is required by law. 2. It is additional to the basic package. A health-insurance plan may include three main types of coverage: a. Supplemental insurance - coverage not included in the basic package, such as dental and long-term care. b. Expansionary insurance - expansion of services covered in the basic package, such as additional funding for transplants in Israel and abroad. c. Alternative insurance - a substantive qualitative alternative to the services in the basic package, such as indemnification for inpatient expenses for private surgery. This field is complex and difficult to control, because it sometimes combines public and private insurance that affect each other.

3. The coverage and the premium vary over time, depending on amendments to the law or technological developments. 4. Most supplemental plans are long-term arrangement that reflect a commitment to continuity in coverage despite changes in the insured s state of health and age. Table D-2 Comparison of Health Funds Supplemental Health Coverage with Insurance Companies Coverage Insurance operator Health fund Insurer Risk-taker Health fund + government Insurance companies Source of funding Broad-based membership The insured, commensurate with risk Marketer Health-fund employees Insurance agents/direct insurance Regulator Ministry of Health Commissioner of Insurance Rate Standard (age-adjusted) Risk-adjusted Structure of operator Nonprofit organization For-profit organization Contracting document Statutes Policy

Provision of Supplemental Health Services by Health Funds An amendment to Paragraph 10 of the State Health Insurance Law, included in the Economic Arrangements Law that passed on January 1, 1998, authorized the health funds to offer plans for the provision of supplemental health services, with the exception of long-term care insurance. The main attributes of these services include the following: Health funds themselves may not offer long-term care insurance. Health funds may not offer financial compensation to members as an alternative to service. Health funds must allow any applicant to join, irrespective of his/her state of health or economic situation. The plans include numerous types of coverage (surgery, transplants, ophthalmogical care, etc.). The coverage is limited in terms of ceilings and benefits. The terms in the statutes are flexible and adjustable over time. Most coverage entails a co-payment There is a standard rate for each age-group, irrespective of the state of insured s health. Private Insurance by Means of Insurance Companies Israel s private health-insurance market has been developing rapidly in recent years, especially after the State Health Insurance Law was enacted. Since insurance companies operate a pronouncedly economic basis, they manage risks, manage long-term insurance reserves, arrange reinsurance where necessary, and meet capital-adequacy requirements. To remain solvent and profitable, insurance companies must keep their rates and risks in alignment, to the extent possible, by means of actuarial pricing. They must also cover future liabilities toward the insured by managing reserves from which proceeds will eventually be paid. In the course of these activities, they must meet capital-adequacy and financial-solvency requirements that the Commissioner of Insurance sets from time to time. The companies activity is regulated by the Control of Insurance Transactions Law, which stresses the insurance companies meeting future liabilities to the insured.

The Insurance Contract Law regulates relations between insurer and insured in order to safeguard the rights of the latter, in concern for the public interest and, in particular, the interests of the individual insured. Additional characteristics: Medical underwriting is performed when the insured joins the insurance plan. There is a wide range of policies and coverages at different risk-adjusted prices. Insurance proceeds may be provided in the form of compensation, indemnification, or service. Integration of Supplemental Health Services and Commercial Insurance Israel s private health-insurance market offers the public a range of new services that complement the basket and the health funds supplemental health services. An example is the sale of policies that take account of the two aforementioned types of coverage and undertake to compensate the insured for the difference between actual medical expenses and the payment due in accordance with the health funds supplementary health services. The result, in essence, is a second or third level of service on top of the health funds services, in which the insurance benefit is conditioned on the fund s coverage and the limits of the supplemental health services. To issue integrated policies of this type, it is necessary to define citizens rights in the basket and members rights in supplemental health services, and to eliminate impediments to integration of the private and public markets. Overinsurance insureds obtain many kinds of insurance that create dual coverage, in addition both to the health tax that they pay and the health funds supplemental health services. B. LONG-TERM CARE INSURANCE The Health Insurance Law states that health funds may not offer long-term care insurance. Accordingly, only a licensed insurer may offer this coverage. Since the private insurance market has branched into long-term care insurance in recent years, additional rules and guidelines are needed to protect the insured public more effectively and make sure that the insurers meet their obligations. After a thorough examination of long-term care insurance in

various respects, including ways in which regulators in other countries deal with this issue, the Commissioner of Insurance issued a draft circular, dated August 9, 1998, in this matter. An abstract of the circular follows. The regulatory process will be completed when transitional rules for existing policies and further clarifications, as needed, are written. Characteristics of Long-Term Care Insurance The purpose of long-term care insurance is to provide financial support for persons who can no longer carry out Activities in Daily Living or who need supervision situations that carry a heavy financial burden. The large majority of long-term cases occur after age seventy-five. Accordingly, insurance coverage for these cases requires special attention as a long-term product. The cost of the insurance risk rises steeply and very rapidly in the older age brackets, a fact that reduces the average insured s ability to pay a full risk premium at the relevant age, especially since he/she has retired from work at this time. Additionally, since there is a lack of available and reliable data to determine the current premium and uncertainty about future developments that would probably affect the level of risk in this field, it is difficult for insurers to make a commitment to a foreknown premium structure that will not change in the long term. Conclusions Concerning the Essence of Long-Term Care Insurance The aforesaid leads us to conclude, first, that long-term care insurance should be offered as long-term insurance that provides coverage for the age period in which the insured is especially exposed to risk (the continuity principle). The second conclusion, stemming from the form of the function of age-adjusted insurance risk, is that long-term care insurance should be offered at a level premium for old age and that appropriate reserves should be accumulated for that stage in life, since the insured may not be able to afford the risk premiums. Additionally, a level premium protects the insurer from the antiselection that would occur in the case of an adjustable premium, which might prompt healthy insureds to cancel their policies because of steep increases in premium. The third conclusion is that insurers should be given flexibility in raising the premium level and, concurrently, that the insured should be protected against substantial premium increases.

If a substantial increase occurs, insured should be allowed to choose between maintaining their policies at a lower level of coverage and no increase in premium, or terminating their premium payments and receiving a paid-up policy (abbreviating the term for payment of insurance premiums). The insurer s undertaking to offer a paid-up policy would also prevent it from offering artificially low premium rates at the outset, on the assumption that it would be able to raise the rates limitlessly in the future. The (American) National Association of Insurance Commissioners, the NAIC, has recently adopted a similar requirement, in coordination with the insurers. A fourth conclusion, derived from the foregoing, is that for the insurer to be able to meet its undertakings as aforesaid, and to protect the rights of the individual insured, the premium should be set at a level that will suffice to finance full coverage for the individual insured, irrespective of other insureds. Risks to the Public and to Insurers Insurance plans that are not based on principles of fair business practices vis-a-vis the insured on the one hand, and on the assurance of solvency on the other hand, are liable to create a severe problem in public affairs. Examples of this are insurance plans that do not assure long-term continuity, even though such plans are usually based on cross-subsidization among age groups and generations of insured and on future adjustments of premiums with no protection for the insured. Several substantial problems that may occur are described below: 1. If long-term care insurance is offered on a non-guaranteed renewable basis and with no assurance of continuity, it may not be in effect when the insured needs it, i.e., in old age. This risk is especially salient in long-term care insurance, which is needed mainly in old age (75+) and is purchased at a relatively young age, when the risk is much lower. 2. For similar reasons, a future increase in premium with no protection for the insureds may force the insureds to cancel their policies and forfeit all benefits, precisely when they need the insurance after having paid a level premium for years. 3. If the premium is based on subsidization of elderly insured by young insured, the former are exposed to the risk of increases in premium or impairment of entitlements in the event of a lengthy decline in the number of young insured who have to finance the subsidy.

This development is especially likely in a competitive market, in which other insurers offer more attractive insurance conditions to relatively young insured. 4. An insurer who offers a long-term insurance plan based on cross-subsidization of premiums and unlimited premium increases in the future may incur a large financial risk. A significant premium increase for elderly insured may encounter public resistance to prevent harm to the elderly, thereby forcing the insurers to continue offering these plans at a loss. The rules in the draft circular, sent to the insurance companies, were formulated in accordance with the principles shown above.