Case Study

Rate Increases and Downgrades

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Situation

The client company is a large closed block of long-term care (LTC) insurance business that includes some of the oldest LTC policies in the country.  The original actuarial assumptions were fraught with inaccurate pricing assumptions that did not accurately predict the difficult future market and health care cost conditions that exist today. This has resulted in loss ratios that far exceeded expectations. Rate increases had been implemented on various policy forms over a 10-12 year period to try and mitigate the adverse conditions with hopes of no further rate increases. However, after a four-year hiatus from rate increase filings, adverse conditions continued, requiring the company to once again consider rate increases. 

Action

Fuzion worked with the client to come up with an option that was win-win. Using its advanced analytical platforms, Fuzion set out to identify a series of classes that were the biggest drivers of the adverse experience. This effort involved analyzing a range of variables and applying algorithms to predict take rates, adverse impacts, and financial effects. After identifying the classes, outside the box thinking was applied to identify a series of options that would limit the financial impact to policyholders while also solidifying the client company’s current and future financial position.

The resulting options are shown below:

  • Rate Increase – policyholders within the class could maintain compound inflation benefits but would be subject to the rate increase
  • Downgrade – to avoid the rate increase, policyholders within the class could downgrade their policy benefits by electing to freeze their accumulated inflation benefits at current rates or increasing their elimination period, while additionally obtaining a discount on current premium rates
  • Non-Forfeiture – customary non-forfeiture option required by some states

Due to original pricing of the inflation options in the original policy forms, the downgrade options reduced the financial exposure to the company in both active life reserves and cash flow projections, even when considering the reduced premium amounts, while preserving the policyholder’s accumulated benefits. 

Although similar to other rate increase offers in the marketplace (i.e., landing spot, freeze and drop), providing policyholders with a direct dollar benefit through a premium discount was a spin that had the potential to increase take rates while improving capital and surplus positions. Fuzion worked directly with states and subject matter experts to garner feedback on how the downgrade options would be perceived by regulators, incorporating feedback as necessary for clarity in the state rate filings.

After the client company approved the options, Fuzion moved forward with preparing filings and developing a long term filing and implementation schedule. The development of the schedule and take rate assumptions involved assessing historical rate increase information to identify state filing characteristics (e.g., approval time frames, questions asked, changes in state regulations) in addition to factoring in the financial impacts presented by each state. Next Fuzion gathered the filing materials for each state and implemented the filings, prepared state objection and informational request responses, and tracked the progress of the filings via SERFF. 

Upon the approval from each state, Fuzion then managed the process of enhancing system functionality to allow for the unique downgrade options, generating policyholder offer letters and election forms, and ensuring the third-party administrator’s processes were defined for handling responses and elections.

Result

Anyone who has gone through rate increases knows the complex and lengthy process of preparing for, filing, and implementing rate increases. Fuzion helped this client manage the process from start to finish, providing creative thinking to ensure that the approach was not harmful to policyholders and helped improve the client’s financial position. As expected, the unique offers resulted in downgrade option take rates of more than 30%. The success of this option improved the company’s financial position and overall stability.