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REGULATORY REFORM FOR LTCI VIABILITY

Session 22: February 27, 2006

Session Producer:

Sharon Reed, Asst Vice President

Strategic Operations

Penn Treaty Network America

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Regulatory Reform for LTC Viability

John HartnedyFormer Arkansas Deputy Commissioner

Mark LitowMilliman

Cameron WaitePenn Treaty Network America

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Session Format

This interactive session will provide opportunity for questions and discussion

after introductory comments from the panelists.

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Introduction

• What’s Changing? Who’s Changing It?

• Actuarial Influence on Public Policy

• Updates beyond Washington

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John Hartnedy

Former Arkansas Deputy

Commissioner

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Overregulation

• Federal Government

• State Government

• Hinders product development

• Creates excessive work

• Limits rate competition

• Limits capital

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Disclosure

• IMSA- an example of an overall approach

• Industry association needs to police itself and publish results

• Industry is not creative enough!

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Reserves

• Formulaic covers about 80% of companies

• Fair market value and Enterprise Risk Management are coming…

• Independent actuaries need to certify results.

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Mark E. Litow, F.S.A.

MillimanConsultants and Actuaries

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Results of Current Reserving Requirements

• Strong tendency for increasing Statutory and GAAP margins due to Persistency/Morbidity/Interest Direction / recent RBC exception

• High Increase in artificial margins and back load income / Statutory and GAAP

• Results– Break even period increases– Cost of capital high (including risk based capital formula

mismatch)– High taxes– Companies’ financial situation harmed / premiums increase– Companies more reluctant to enter/stay in business

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LTC Statutory Contract Reserves

Mortality:– 1994 Group Annuitant Mortality Table (GAM)

for Policies Issued in 2005 and laterSample Cell (Age 65)

Scenario IRR Premium

Base: 1983 GAM 15.0% $2,910

1994 GAM 13.15% $2,910

1994 GAM 15.0% $3,000

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LTC Statutory Contract Reserves

LapsePrior to 2005 2005 and Later

For policy years 1-4, the lesser of 80% of the voluntary lapse rate used in the calculation of gross premiums and 8%

For policy year 1, the lesser of 80% of the voluntary lapse rate used in the calculation of gross premiums and 6%

For policy years 5+, the lesser of 100% of the voluntary lapse rate used in the calculation of gross premiums and 4%

For policy years 2-4, the lesser of 80% of the voluntary lapse rate used in the calculation of gross premiums and 4%

For policy years 5+, the lesser of 100% of the voluntary lapse rate used in the calculation of gross premiums and 2%, except for group insurance as defined in [Section 4E(1) of the NAIC LTC Insurance Model Act] where the 2% shall be 3%.

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LTC Statutory Contract Reserves

Lapse Sample Cell – Age 65

Priced for Lapse 9%, 7%, 5%, 3%, 2%, 1.5%

IRR Premium

Prior to 2005 15% $3,000

2005 and Later 15% $3,000

Sample Cell – Age 65

Priced for Lapse 9%, 7%, 5%, 3%, 3%

Prior to 2005 2005 and Later

IRR Premium

Prior to 2005 15.0% $2,640

2005 and Later 12.8% $2,640

2005 and Later 15.0% $2,750

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LTC Statutory Contract Reserves

Interest:– NAIC Model “… Maximum rate permitted by

law in valuation of whole life insurance …”– 4% in 2006

Sample Cell (Age 65)

Scenario IRR Premium

Base: 4.5% Valuation Rate 15.0% $3,000

4.0% Valuation Rate 13.3% $3,000

4.0% Valuation Rate 15.0% $3,100

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LTC Statutory Contract ReservesMethod:

– 1 Year Preliminary Term (since 1/1/92)

Morbidity:– “Valued using tables established for reserve purposes

by a qualified actuary and acceptable to the commissioner.”

– “In determining the morbidity assumptions, the actuary shall use assumptions that represent the best estimate of anticipated future experience, but shall not incorporate any expectation of future morbidity improvement.”

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LTC Risk Based Capital

Current: • 25% of first $50 million earned premium• 15% of earned premium in excess of $50 million• 5% of claim reserves

New:• 10% of first $50 million earned premium• + 3% of earned premiums in excess of $50 million• + 25% times first $35 million in incurred claims• + 8% times incurred claims in excess of $35 million• + 5% of unpaid claims reserves• + 10% non-can additional charge

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LTC Risk Based Capital

New Pricing (Sample Cell)

IRR Premium

Current RBC 15.0% $3,000

New RBC 18.5% $3,000

New RBC 15.0% $2,910

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Cameron Waite

Penn Treaty Network America

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Industry and Regulators

• Industry– Rate Increases– Expanded agent

commissions– Closed blocks– Company exits

from business line

• Regulators– Consumer protection– Monitoring reserves– Surplus adequacy– Future rate stability

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• Balancing Consumer Advocacy and Industry Viability

• Regulators role/ Industry role

• Legislation and Regulation at the state and federal level to gain ongoing viability

Moving Ahead…

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Interactive Discussion• Is regulation hurting the viability of the LTC

market? If so, what types of directional changes would you suggest?

• Should there be a morbidity standard for LTC?

• How do we develop a mechanism to evaluate current regulations/rules in today’s market?

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Interactive Discussion• What is the biggest threat to the LTC

private market?

• Do all regulations have to be applied consistently?

• What is the impact of changing the rules mid-stream?

• What is the impact from morbidity improvements?

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What Are Your Questions?