Group LTCI Rate Increases

1. Group LTCI Rate Increases Sixth Annual Intercompany LTCI Conference February 26 – March 1, 2006 Anaheim, CA

2. Session Participants PRODUCER: • Roger Gagne, John Hancock PRESENTERS: • Bill Weller, Omega Squared of Sedona • Peggy Hauser, Long Term Care Group • Al Schmitz, Milliman

3. Observation There have been fewer rate increases in Group LTC than in Individual LTC • Why?? • Please note your opinions on the sheet provided • At the end we’ll ask you to record whether your opinions have changed • Results will be left tomorrow outside this room, for you to pick up

4. Session Overview • During this session, our speakers will consider various possible explanations for our observation on GLTC rate increases • Audience participation is encouraged!

5. Hypothesis There have been fewer rate increases in Group LTC than in Individual LTC because… Compared to Individual LTC, GLTC insureds are younger, and GLTC plans have longer elimination periods. Thus, claims to date are quite small compared to premiums, and rate increases can not yet be justified.

6. Issue Age Data • Data from the fourth Intercompany Study by the SOA LTC Experience Committee • Group insureds are younger • Average issue age is 47 for group, 67 for individual

7. Percentage of Total Issues by Issue Age Group

8. Implications • Younger ages means lower incidence of claim • Much more exposure needed to get credible experience • One rule of thumb is that 1,082 claims are needed to have 90% confidence that the observed incidence rate is within 5% of expected 1 1 Source: Longley-Cook (1962), An Introduction to Credibility Theory

9. Incidence Rate (per 1,000) by Attained Age

10. Implications • Recall that average issue age for Group was 47, versus 67 for Individual • Even if Group’s overall incidence rate is 1 per 1,000, would still need over 1,000,000 life-years of exposure for 90% confidence within 5%

11. Elimination Period Differences • Intercompany Study data also showed that little Group business is sold with short elimination periods • Incidence rates for elimination periods of 20 days or less were much higher than those for longer EPs

12. Elimination Period % Group Incidence Rate (per 1,000) 0 Days 7.6% 15.2 20 Days 0.4% 11.2 30 Days 11.3% 4.0 60 Days 70.0% 2.4 90 Days 72.8% 1.4 Incidence Rates by Elimination Period

13. Your Opinion There have been fewer rate increases in Group LTC than in Individual LTC because . . . • Compared to Individual LTC, GLTC insureds are younger, and GLTC plans have longer elimination periods. Thus, claims to date are quite small compared to premiums, and rate increases can not yet be justified. • What do you think?

14. Bill Weller Omega Squared of Sedona

15. Hypothesis There have been fewer rate increases in Group LTC than in Individual LTC because… Companies entered the Individual market first and learned ways to avoid mis-pricing when they later entered the Group market.

16. Later Entry? • Actual Data - 7 Group writers • Individual before Group • 5 or more years • 2 companies • Group before Individual • 5 or more years • 2 companies • Essentially same time • 3 companies

17. Hypothesis - Revised There have been fewer rate increases in Group LTC than in Individual LTC because… Group companies entered after useful Individual experience from other companies was available.

18. Before 1985 0 companies Before 1990 5 companies Before 1995 5 companies Before 2000 7 companies Actual Entry Dates

19. Your Opinion There have been fewer rate increases in Group LTC than in Individual LTC because . . . • Later entry - avoided mis-pricing? • Later entry - Individual experience was available? • What do you think?

20. Hypothesis There have been fewer rate increases in Group LTC than in Individual LTC because… Companies in Group market used persistency assumptions closer to actual than those in Individual market – So impact of adverse experience has been smaller.

21. Persistency Differences • Mortality – probably less use of Life mortality in early filings • Lapse Rates – historical non-LTC lapse rates for Group products smaller than for similar Individual • Early LTC lapse rates lower for Group than Individual

22. Persistency Improvements • Improvements - Mortality Reduced deaths / 1000 Under 0.5 ages under 48 0.5 to 1.5 ages 48 to 71 1.5 to 5.0 ages 72 to 76 and 89+ 5.0 to 8.0 ages 77 to 88 94 GAM versus 83 GAM

23. Persistency Results • Lapse Rate Studies: SOA 1st Study 1984-1991 (publ. In 1993-94 Reports) • Table F-2 Lapse Rates by Issue age and Duration shows age group 50-59 lower than 60-69 by 71% to 47% for years 2-4 (lowest lapse rate = 7.1%). • 50-59 only place where lapse rates under 12%!

24. Persistency Results • Lapse Rate Studies: HIAA 1993 • Total Termination Rate by Issue Year: 1 - IF (Dec. ‘93) / IF (Dec. ‘92) • Individual Results: • Iss Yr 1990 8.3% • Iss Yr 1989 7.7% • Iss Yr 1988 & Prior 9.6% • Group Results - not credible but better than Individual

25. Persistency Results • Lapse Rate Studies: HIAA 1996 • From 1993 to 1994 (Total Term) • Individual Results: • Iss Yr 1992 8.0% • Iss Yr 1991 7.2% • Iss Yr 1990 7.0% • Iss Yr 1989 7.4% • Iss Yr 1988 & Prior 8.9% • Group Results 92 & Prior 3.8%

26. Persistency Assumptions Now • Most Recent review of Filings by Academy for NAIC Minimum Reserve Requirements • Individual assumed ultimate lapse rate at 2.5% or less • Group assumed ultimate lapse rate at 3.5% or less

27. Your Opinion There have been fewer rate increases in Group LTC than in Individual LTC because . . . • Persistency differences between original assumptions and actual experience have been smaller for Group? • What do you think?

28. Peggy Hauser Long Term Care Group

29. Hypothesis There have been fewer rate increases in Group LTC than in Individual LTC because… GLTC insureds have purchased less comprehensive benefit designs – fewer unlimited benefit period purchases and fewer plans with compound inflation protection.

30. Who Bought Unlimited Benefits? INDIVIDUAL GROUP Source: Intercompany Study

31. Who Bought Inflation Protection? INDIVIDUAL GROUP Source: Intercompany Study

32. Expected Claims by Policy Year Issue age 67 – Female Policy Years Plan without Inflation Protection Plan with Inflation Protection Lifetime Benefit Period - $100 per day 1,000 policies ($’s in Millions) 1-10 $7,211 $11,100 11-20 $19,121 $44,495 21-30 $18,839 $64,450 Total $41,863 $111,927 What If Lapse Rates Are Reduced by 1%? Total $50,451 $137,781 Addt’l Claims $8,588 $25,854 Compound Inflation Benefits Exacerbate the Impact of Deviations in Persistency

33. Were Unlimited Benefit Periods and Compound Inflation Benefits Underpriced? • Unlimited benefit periods and compound inflation benefits have experienced the highest increases in new business rates in the individual market. • 3 Examples: • Company A • Company B • Company C

34. Were Unlimited Benefit Periods and Compound Inflation Benefits Underpriced? • Company A – Comparison of filings in 2001 & 2003 • Lifetime benefit premiums increased by roughly 12% more than 3 year benefit premium premiums. • Loads to add compound inflation protection doubled at the youngest ages.

35. Were Unlimited Benefit Periods and Compound Inflation Benefits Underpriced? • Company B – Comparison of filings in 2000 & 2003 • Lifetime benefit premiums increased by roughly 9% more than 3 year benefit period premiums. • No change in inflation protection loads – considerably lower loads than Company A.

36. Were Unlimited Benefit Periods and Compound Inflation Benefits Underpriced? • Company C – Comparison of filings in 2001 & 2004 • Lifetime benefit premiums increased by roughly 16% more than 3 year benefit premium premiums. • Loads to add compound inflation protection increased by 4-13%. • Inflation loads higher than Company B but significantly less than Company A

37. Your Opinion There have been fewer rate increases in Group LTC than in Individual LTC because . . . • GLTC insureds have purchased less comprehensive benefit designs – fewer unlimited benefit period purchases and fewer plans with compound inflation protection. • What do you think?

38. Al Schmitz Milliman

39. Hypothesis There have been fewer rate increases in Group LTC than in Individual LTC because . . . • The number of group carriers is small and a rate increase would damage ability to market, and/or • There is a threat of an employer moving inforce business.

40. GLTC Market • Approximately 20 U.S. organizations involved in GLTC • Many more (over 100?) Individual LTC companies • Top five GLTC carriers have 90+% of employer-sponsored sales

41. The Current Group Market • Most Cases are from RFP / Competitive Bid • Items Important in Competitive Bid • Carrier qualifications • Rate stability • Plan design • Customer service • Underwriting • Care management • Premiums • Marketing enrollment • As Chief Decision Maker for Employer how would you compare two LTC Insurers on these items if one of them had a rate increase? • Rate increase lawsuits ?

42. Savvy Management? • Short term bottom line impact versus long term market potential • Impact of rate increase on inforce business • Move the business (good riddance?) • Detriment to other lines of business

43. Your Opinion There have been fewer rate increases in Group LTC than in Individual LTC because . . . • The number of group carriers is small and a rate increase would damage ability to market, and/or • There is a threat of an employer moving inforce business. • What do you think?

44. Questions & Discussion