The first reported interest in developing a regulatory framework for private LTC insurance was in 1985 when a series of conferences between legislators, regulators and industry representatives were held; there was also growing interest in Congress in the area of nursing home insurance.39 As a result of a sustained effort, NAIC adopted the first Model Act in December 1986, followed by the first model regulation in 1987. Many states adopted these model regulations. In fact, by 1989, more than two-thirds of states had adopted the NAIC model act and/or regulation.40 The model regulations became the reference point for companies developing or modifying policies they were selling -- or intended to sell -- in the marketplace. The model regulation provides guidance and requirements related to many issues affecting the product including capital requirements, pricing, marketing and sales, agent licensing and education, and consumer protections, to name but a few.
In December 1988, the first attempt aimed at modifying insurance contracts occurred. The regulation included prohibitions against prior hospitalization requirements as a condition for receipt of institutional benefits and in 1989, the same requirement was eliminated for home care benefits. It was not until 1995, however, that a new section -- Section 27 -- was added to the Act that provided for standards on the conditions under which insurance benefits would be paid. Regulators, consumer representatives and the industry expressed widespread support for greater standardization.
In 1998, the Senior Issues Task Force (which was part of the NAIC) was charged with the task of reviewing the LTC Insurance Model Act and Regulation for compliance with the HIPAA of 1996. Among other things, HIPAA set benefit eligibility standards for tax-qualified LTC insurance policies. The federal requirement -- detailed in Section 213, 7702B and 4980C of the Internal Revenue Code -- was that benefits would be triggered when the insured could not perform at least two of five ADLs, or had severe cognitive impairment and six ADLs were specified in the Act. In 2000, an update to the Model Regulation was completed which added a new section -- Section 28. The purpose of this section was to assure that standards for qualified LTC insurance policies were consistent with HIPAA.
Finally, there have been a number of changes at the NAIC level related to the pricing of policies. Until the early part of this decade, insurers needed to certify that policies were priced to achieve a 60% lifetime loss-ratio. This meant that at a statutory interest rate (of 3.5%-4.5% depending on state) the policy had to pay out 60% in benefits (claims payments) to consumers. As pricing became inadequate and insurers had to increase rates, insurers had to certify that the pricing took into account "moderately adverse conditions" and the minimum loss-ratio requirement was removed. The intent was to assure that companies would not under-price their policies and that premiums would be more stable over the life of the policy. To this day, the NAIC remains the focal point for the regulation of LTC insurance.
The passage of HIPAA conferred favorable tax treatment to LTC policies that met a series of standards set out in the law, the most important of which related to benefit eligibility standards. HIPAA clarified the treatment of premiums for qualified plans as medical expenses for individuals deducting medical expenses beyond 7.5% of their gross income and by not taxing LTC insurance benefits up to certain limits. In addition to standardizing policies, the law helped to signal to the market, that LTC insurance was something that should be considered by the public. It appeared as a line item on every federal income tax return.
On the other hand, few individuals actually purchasing the insurance would benefit from the favorable tax treatment. This is because a policyholder would have to have taxable income, very high medical expenses, and itemize expenses (rather than take the standard deduction.)41 The law did encourage states to begin to provide tax deductions and exemptions for the purchase of insurance. In fact more than half the states provide tax incentives for the purchase of LTC policies, and most of these are linked to qualified policies.42 Even so, there is little evidence that such policies have led to a discernible effect on LTC insurance take-up rates. This is not too surprising given that the value of incentives is fairly low compared to the costs of the policies themselves.43
There are a number of clear trends in the development of the industry in the 1990s that laid the groundwork for many of the market exits that occurred in the subsequent decade. These included the development of more comprehensive policies without commensurate adjustments to premiums, pressure from agents to add benefit features that served to confuse consumers and make the purchase decision more difficult, and a likely underinvestment in risk management given the unknown nature of the morbidity risk. While there was a rapidly developing regulatory infrastructure, many insurers felt that the NAIC model act imposed requirements that added to the cost of the product without a commensurate level of actual consumer benefit. Finally, tax benefits were considered to be more ephemeral than real and were seen to have little impact on the overall level of demand. Taken together, these factors all resulted in challenges to the underlying profitability of the product, which is discussed in more detail below.