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1 Insurance and Actuarial Advisory Services LTC Click Principles-Based to edit Master title style Approaches Update Robert Hanes, FSA. MAAA

2 LTC Principles-Based Approaches Update Agenda Principles-Based Approaches Overview Status of Long-Term Care Principles-Based Work Group ( LTCPBWG or work group ) Current Valuation and Accounting Bases Reasons for a Principles-Based Approach Long-Term Care Risk Characteristics Concern for Long-Term Care under PBA Recent Work of the LTCPBWG Subgroups Issues Subgroup Stochastic Model Considerations Technical Subgroup Long-Term Care Models Long-Term Care Model Assumptions Traditional Stochastic Next Steps 1

3 Principles-Based Approaches Overview Status of Long-Term Care Principles-Based Work Group Long-term care (LTC) is the Academy s starting focal point for the Healthcare insurance industry A second committee was formed this year to address all other health lines HPBWG 2

4 Principles-Based Approaches Overview Current Valuation & Accounting Bases Current Valuation Bases Standard valuation law Health insurance reserve model regulation Health reserve guidance manual Current Statutory Accounting Bases AP&P* Manual, SSAP* #54 and #55 AP&P Manual, primarily Appendix A-010 AP&P Manual, primarily Appendix A-641 LTC Statutory Reserves Must Meet Minimum statutory reserve standards Gross premium valuation testing Asset adequacy test *Accounting Practices and Procedures, Statements of Statutory Accounting Principles 3

5 Principles Based Approaches Overview Reasons for a Principles-Based Approach Current statutory standards include lock-in May not capture all risks Over/understate reserves and capital Value of consistency with principles-based reserves within companies and with GAAP Coordination with the IASB and FASB 4

6 Principles Based Approaches Overview Principles of Principles-Based Approaches 1. Reserves reflect all material risks 2. Utilizes risk analysis and risk management techniques 3. Incorporates assumptions and methods consistent with company s overall risk assessment process 4. Use of company experience 5. Assumptions based on prudent estimate 6. Reflects risk in calculation of reserves and capital 5

7 Principles Based Approaches Overview LTC Risk Characteristics Lapse rates Morbidity Incidence/severity Claim variability Mortality Interest rates and economic environment Movement among status categories 6

8 Principles Based Approaches Overview Concerns for LTC under PBA Need for future unapproved rate increases Standard valuation morbidity table Regulatory program changes, mandatory benefits Limited experience Block size Implementation costs 7

9 Recent Work of the LTCPBWG Issues Subgroup Defining risk margins Level Variability by business Investigating statistical distributions of claims Monitoring efforts relating to data availability for morbidity table Developed outline of modeling issues 8

10 Recent work of the LTCPBWG Issues Subgroup Stochastic Model Considerations Premium rate changes Unscheduled versus planned Timing Trigger point Reaction time Effectiveness Policyholder behavior Interest rate scenarios Traditional impacts Impact on policyholder behavior (continued) 9

11 Recent work of the LTCPBWG Issues Subgroup Stochastic Model Considerations Unanticipated changes in morbidity or benefit utilization Shift in claim cost curve Improvement/deterioration Future regulatory intervention Retroactive application? 10

12 Recent work of the LTCPBWG Technical Subgroup Specify model requirements Design, develop, and test model Analyze results Monitor and support LRWG and LRWG Modeling Subgroup Coordinate with Standard Valuation Law 2 Economic Scenario Group 11

13 Recent work of the LTCPBWG Technical Subgroup LTC Models Consider potential management action Ease of ability to program the multistochastic-variable LTC product lines Amount of acceptable variance Number of trials to run to establish the proper reserve and capital levels (continued) 12

14 Recent work of the LTCPBWG Technical Subgroup LTC Models Stochastic methods four considered Waiting Time Model current approach Developed by Eric Stallard Duke University Generate two random numbers First determines the time of the next change in status Second determines what the status change is Generate cash flows for the different statuses More efficient projection time and space 13

15 LTC Model Assumptions Traditional Morbidity Own experience Outside sources Termination mortality, lapse, benefit expiration Published mortality table Own experience Investment income Long-term rate Expenses Own experience Rate increases Approved increases Future increases 14

16 LTC Model Assumptions Stochastic Morbidity Need for industry table Adjusted for own experience Total termination Industry versus own experience Investment income Stochastic interest rate scenarios Expenses Own experience Rate increases Future increases 15

17 Next Steps Complete and test waiting time model Develop standard LTC morbidity table Important for small LTC blocks/companies 16