AB 999 Yamada Long Term Care Insurance Rate Stabilization

Office of Assemblymember Mariko Yamada • AB 999 Fact Sheet • 4/20/2011 • Page 1
Assembly Bill 999 (Yamada)
Long-Term Care Insurance
SUMMARY
Assembly Bill 999 would modify the long-term care (LTC) insurance premium rate development
process to protect consumers from excessive premium rate volatility. In addition, AB 999 would
allow consumers to review policy language prior to purchase to allow a consumer to make a more
informed decision.
BACKGROUND
Long-term care (LTC) insurance was first sold in California in the early 1980’s. Since it was a new
product, insurers had no historical experience upon which to rely when setting initial premium rates.
As a result, initial pricing of LTC policies was often based upon what were later found to be
inaccurate assumptions. For instance, insurers initially priced LTC policies based upon a lapse rate
that mirrored the 5% lapse rate found in life insurance policies. This assumption was ultimately
found to be erroneous as most consumers who purchased LTC policies maintained these policies
for decades, thereby assuring that benefits would be available to them in their later years.
As insurers gained more experience in the LTC market, premium rates increased to compensate for
the initial pricing inaccuracies. In response to LTC rate increases on a national level, the National
Association of Insurance Commissioners (NAIC) adopted Model Laws in the late 1990’s in order to
stabilize escalating LTC rates. Following the NAIC Model, the California legislature passed SB 898
in 2000 which became effective on certain dates in 2002 and 2003.
NEED FOR BILL
The rate stabilization features of SB 898 were intended to ensure adequate pricing by requiring that
insurers certify that initial rates were “sufficient to cover costs under moderately adverse
experience,” thereby protecting consumers against the large rate increases that characterized prestabilization
LTC policies. However, the California Department of Insurance (CDI) and insurance
regulators nationwide are seeing an influx of rate increase filings on existing policies. Some of these
rate increases are as high as a one-time increase of 60% or in the form of multiple increases of 20 to
30%. This growing and disturbing trend of LTC rate increases will not stabilize without regulatory
action. Left unchecked, these volatile rate increases will threaten the ability of California consumers
to maintain the protections they relied upon when initially purchasing their LTC policies.
PROPOSAL
AB 999 proposes to do the following:
1. Prohibit insurers from increasing rates more frequently than once every 5 years
for pre-stabilization policies and once every 10 years for post-stabilization
policies.
Why this is needed: Limiting the frequency of rate increases will provide insureds
with greater premium rate predictability, which is especially important for the
many LTC insureds who are on fixed incomes. With this change, insurers will be
Office of Assemblymember Mariko Yamada • AB 999 Fact Sheet • 4/20/2011 • Page 2
forced to make a more accurate prediction of a necessary rate increase since they
wouldn’t be able to file for rate increases request as frequently.
2. Establish that an insurance company may not target a lifetime loss ratio lower
than the higher of the minimum required by law and the target loss ratio
disclosed in a past rate filing by an insurer.
Why this is needed: Consumers have little predictability in LTC rates because an
insurer can change the loss ratio, thus affecting the rates in the future. AB 999
will prevent an insurer from using a loss ratio that is a “moving target” to justify
a rate increase.
3. Require that an insurer’s rate increase filings include the experience of all LTC
written by that insurer and its affiliate (pools the experience of both closed and
open blocks of business).
Why this is needed: If insurers were required to base a rate increase upon
experience that is spread among all LTC forms written in the state rather than
any particular block alone, premiums would stabilize for all clients for that
insurer. The changes proposed by AB 999 would require insurers to pool the
experience of both the closed and open blocks of business, thus stabilizing rates
for insureds.
4. Establish that, for new policy pricing, the insurer cannot shift the impact of the
insurer’s poor investment results to the insured. (Insurer bears the burden of bad
investment times instead of passing the loss to the insured.)
Why this is needed: When an insurer overestimates anticipated investment
return, statute allows insurers to pass the shortfall onto consumers in the form of
a rate increase to make up the difference. Furthermore, insurers are better
positioned to be able to bear the consequences of less than expected investment
return than the consumer (many of whom are on fixed incomes). AB 999 would
prevent an insurer from placing the financial burden of an investment downturn
on the consumer.
5. Require LTC insurers to post sample policies on their websites, allowing
consumers to view policy language prior to purchasing an LTC policy.
Why this is needed: Consumers are often confused about the features of LTC
policies because statute doesn’t require insurers to allow consumers to view
policies before purchasing them. The availability of sample policies would
improve the consumer’s understanding of the policy, promote more meaningful
comparison shopping, and allow the consumer to make an informed decision
about the purchase of the policy.
Office of Assemblymember Mariko Yamada • AB 999 Fact Sheet • 4/20/2011 • Page 3
6. Clarify the LTC loss-ratio requirements per the National Association of
Insurance Commissioners (NAIC) recommendation.
Why this is needed: As part of the NAIC accreditation process, the NAIC has
suggested a simple clarification to CIC 10236.1(d) which was added by statute in
2009. AB 999 would eliminate any ambiguity in the interpretation of the existing
statute. The change does not impact the current meaning of the statute; it merely
clarifies it.
SUPPORT
California Department of Insurance (Sponsor)
Alzheimer’s Association
California Health Advocates
California Senior Legislature
STAFF CONTACT AND SPONSOR
Author’s Office
Ian Blair
Legislative Aide
Honorable Mariko Yamada
State Capitol, Room 5160
(916) 319-2008
California Department of Insurance (Sponsor)
Josephine R. Figueroa Michael Martinez, Deputy Commissioner
Legislative Consultant Legislative Director
Legislative Office California Department of Insurance
300 Capitol Mall, Suite 1700 Legislative Office
Sacramento, CA 95814 300 Capitol Mall, Suite 1700
(916) 492-3550 Sacramento, CA 95814
(916) 492-3573