Consumer Federation of California

Bill Update: AB 999 passed the Assembly Insurance Committee by a vote of 7 to 5 on May 4th. The bill now moves to Assembly Appropriations.

CFC Position: Support

AB 999 (Yamada) modifies the long-term care insurance premium rate development process to protect consumers from excessive premium rate volatility and allows consumers to review policy language prior to the policy being purchased, thus allowing the consumer to make a more informed decision.

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. 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 2000 in order to stabilize escalating LTC rates. Following these Model Laws, the California State Legislature passed Senate Bill 898 (Dunn) [Chapter 812, Statutes of 2000].

The rate stabilization features of SB 898 were intended to ensure adequate pricing by requiring that insurers actuarially certify that initial rates were ‘sufficient to cover costs under moderately adverse experience,’ thereby protecting consumers against the large rate increases that characterized pre-stabilization LTC policies, among other consumer protections.

Despite the adoption of rate stabilization laws designed to control rate increases on LTC insurance policies, CDI and insurance regulators nationwide are seeing an influx of rate filings seeking significant rate increases 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%. Left unchecked, these rate increases will threaten the ability of California consumers, many which are on fixed incomes, to maintain the protections they relied upon when initially purchasing these policies.

Specifically, AB 999 would:

Prohibit rate increases more frequently than once ever 5 years for pre-stabilization policies and 10 years for post-stabilization policies. Currently insureds have little security that their premium amounts will be stable from year to year. We believe limiting the frequency of rate increases will provide insureds with greater predictability of premium amounts which is especially important for the many LTC insureds who are on fixed incomes.

Establish that a 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 the company. Consumers have little predictability in LTC rates as an insurer can change the loss ratio, thereby affecting the rates in the future. We believe this would reduce the likelihood of an insurer using a ‘teaser rate’ to entice an initial purchase and prevent an insurer from using a loss ratio that is a ‘moving target.’

Require that rate increase filings take into account the experience across all LTC forms written by that insurer and its affiliate, in essence pooling the experience of both closed and open blocks of business. 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, we believe premiums would be stabilized for all clients for that insurer.

Establish that, for new policy pricing, the insurer cannot shift the impact of the insurer’s poor investment results on to the insured. When an insurer overestimates anticipated investment return, the shortfall is often passed onto consumers in the form of a rate increase to make up the difference. We believe insurers are better positioned to be able to bear the consequences of less than expected investment return than is the consumer.

For all these reasons CFC supports Assembly Bill 999.