Minn. DOI: Higher LTC Rates Due to Lower Lapse Rates and Investment Income

Premiums have increased for some long-term care insurance policies issued to Minnesota consumers largely because policyholders are maintaining their coverage and interest rates have decreased in recent years. Those findings are contained in a Minnesota Department of Commerce report on the current long-term care insurance market in the state.

Minnesota Commerce Commissioner Glenn Wilson asked his staff to study LTC rates in Minnesota after hearing from some consumers about recent rate increases. Some policy premiums have increased by as much as 45 percent within the last year.

The department’s review concluded that rate increases have been the result of two primary factors:

—Reduced policy lapse rates: Most companies assumed that policy lapse rates—the proportion of policyholders that stop paying premiums and let their policies terminate each year—would continue at historical levels of 10 to 15 percent of policies each year for the first few years after policy issue, and 4 to 6 percent per year in later years. However, those levels have reduced dramatically in the last five to nine years. The premium rates are now much less likely to be sufficient to cover the total anticipated claims.

—Reduced interest rate earnings on investments: Ten years ago, a typical long-term interest rate assumption might have been around 7 percent to 9 percent. It was impossible to foresee that long-term interest rates would drop to about half of that level. This change had a dramatic impact on the ability of companies to provide the promised benefits at the existing rates.

Based on recent rate filings with the department, the estimated range for an LTC policy is:
—$1,500 to $3,000 per year, issued at age 45
—$3,000 to $6,000 per year, issued at age 65
—$7,500 to $15,000 per year, issued at age 75

Based on the cost for a single person, a newly issued policy, with the following fairly comprehensive benefit coverage: $150 per day nursing home benefit, $75 per day for home health care, inflation increase of 5 percent, five-year maximum benefit length, no nonforfeiture benefit, a 30-day elimination period before benefits start, typical underwriting standards.

“Premium increases are not automatic,” said Commissioner Wilson. “Companies must prove that they need to increase rates so they can meet their obligations to policyholders and pay future claims. All long-term care insurance policy rates must be reviewed by the Commerce Department for compliance with Minnesota law. I have asked staff to take a hard look at all future rate filings and to request any additional information to ensure that premiums are not excessive.”

At the end of 2003, about 113,000 individuals were covered under long-term care insurance in Minnesota, according to a report from the National Association of Insurance Commissioners based on insurance company filings. About half of these individuals have received increases in their rates ranging from 10 percent to 45 percent since 2002. Prior to this time, LTCI rate increases had been relatively rare.

Topics Profit Loss Minnesota