LTCI rate wiggle room: How much is enough?

Should state insurance regulators require an issuer of long-term care insurance (LTCI) to include a "margin" equal to at least 10 percent of expected lifetime claims to protect against problems?

Or would requiring a 10 percent cushion against hard times simply be a bit of fancy-sounding actuarial mumbo jumbo?

Regulators, outside actuaries and others talked about possible LTCI rate margin requirements and other rate stability proposals recently during a Senior Issues Task Force LTCI issues meeting that took place recently in Reston, Va.

The task force, an arm of the National Association of Insurance Commissioners (NAIC), recently posted audio recordings of the meeting on its section of the NAIC's website.

The task force organized the meeting in response to LTCI issuers' moves to increase rates, and in the hope of making the rates for the LTCI products now being sold more stable.

The task force has been drafting a model LTCI rate increase bulletin and possible changes to the NAIC's LTCI model regulation.

Bonnie Burns, a coonsumer advocate, said at the hearing that regulators should keep consumers who have done everything insurers and regulators have urged them to do to protect themselves against long-term care (LTC) costs against suffering because of insurers' pricing mistakes.

One draft of proposed model regulation changes calls for an insurer to include a 10 percent margin for error in the premiums to protect the prices against "moderately adverse experience."

Patrick Kelleher, president of the U.S. life division at Genworth Financial Inc. (NYSE:GNW), said he thinks the margin should be at least 10 percent. 

By now, Kelleher said, Genworth has information about 300,000 LTCI policyholders who have died since the 1970s, about 200,000 who have filed LTCI claims, and about 15,000 insureds who have been over age 90 when they filed their LTCI claims.

Genworth now understands mortality, morbidity, claim severity and lapse trends well, Kelleher said.

"It's what you don't know and can't see that you have to worry about," Kelleher said.

One risk, for example, is that medical technology could greatly extend the life expectancy of people with cognitive problems without reducing their need for LTC services, Kelleher said.

Actuaries who have worked on the 10 percent margin proposal said insurers would have to defend whatever margins they set, even if they used the 10 percent default margin.

Tomasz Serbinowski, a Utah actuary, said he thinks requiring a 10 percent margin would be unscientific and give rate calculations a false air of precision.

"I actually have a scientific answer why it's 10 percent," Serbinowski said. "It's because humans have 10 fingers."

If humans had some other number of fingers, the margin included in the draft regulation revisions would probably be equal to that number, Serbinowski said.

Regulators also talked about the need to conduct annual reviews of the status of blocks of LTCI business, in an effort to help insurers correct any problems early.

Correction: An earlier version of this article gave the wrong first name for Patrick Kelleher. His first name is Patrick.

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