TABLE 4. Key Pricing Assumptions in Developing LTC Insurance Premiums

06/07/2015

TABLE 4. Key Pricing Assumptions in Developing LTC Insurance Premiums

Pricing ParameterDescriptionTypical Assumptions
MorbidityThe claims that are expected to be paid out based on the specific benefit design of the policy.SOA Experience reports National public data sources Insured Experience.
MortalityThe underlying mortality table employed to determine how long individuals who have policies are expected to live and pay premiums and collect benefits.Annuitant mortality tables (e.g., 1994, 2000).
Interest RateBecause the product is level-funded, there is a great deal of pre-funding occurring at early durations of policy ownership and this is the rate or return assumed on invested premiums and risk-based capital (RBC).1990s: 5% - 8%2000s: 3% - 5%Current: 2% - 4%
Voluntary Lapse RatesNot all individuals will hold their policies until death. For a variety of reasons people may cease paying premiums. High voluntary lapse rates lead to lower premiums because premium reserves from a lapsed policy are retained by the company without related future claim expenses.1990s : 8% first year declining to 4%2000s: 6% first year declining to 3%Current: 4% first year declining to 0.5%
Underwriting Selection EffectA group that is underwritten tends to be healthier than a non-underwritten group and this has a positive impact on the morbidity.Claims reductions factors typically wearing off within 5-7 years of policy issue.
Acquisition Costs and AdministrationThese are the costs associated with "producing" and servicing the policy and include marketing and sales expenses (commissions), underwriting, claims management, ongoing policyholder billing and premium collection and other administrative expenses.Sales costs typically greater than 60% of first year premiums and then leveling out at lower levels. Ongoing policyholder administration and claims management as a fixed per policy fee or percent of premium.
ProfitThis is the amount of load or additional charge put into the product to assure an adequate return for the insurer.Profit measures including pre-tax profits, post-tax profits, internal rate of return (IRR), pricing to lifetime loss-ratio.