A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program. A. Background on Long-Term Care Underwriting

10/14/2011

There are a variety of ways that companies approach the underwriting process. The specific strategy can reflect attitudes toward risk selection, competitive positioning, sales and marketing, and pricing philosophy. Regardless of the specific approach used by companies, the overall purpose of underwriting is to assure that individuals purchasing insurance are representative of the anticipated risk profile that has been assumed in the underlying pricing of the product. More specifically, the underwriting process is all about risk selection and enabling companies to guard against adverse selection; that is, underwriting is used to protect against the likelihood that individuals presenting with a “riskier profile” than anticipated, will not end up dominating the risk pool. The potential for adverse selection is always a factor to be dealt with since those who would likely place the highest value on having insurance protection are also the ones who believe they are most likely to receive benefits. Clearly, some companies are more successful at underwriting than others and in fact, poor underwriting practice and experience has resulted in a number of major LTC insurance carriers having to exit the market or request significant rate increases.

In general, underwriting practice can be characterized in terms of two broad dimensions: (1) medical criteria and (2) tools and requirements gathering. Regarding medical criteria, there are three domains on which companies focus their attention and these are the medical, functional, and cognitive status of individuals. In essence, the company is trying to identify those factors that put the individual at immediate or near term need for the services that are being insured for, namely, human assistance required to compensate for an individual’s inability to perform Activities of Daily Living (ADLs) due to functional deficits or to cognitive issues. Diagnoses are actually markers for current or future manifestations of functional need. Thus, having a particular diagnosis, like acute heart disease, would not automatically disqualify someone from buying a policy. Rather, what is important is whether that diagnosis is likely to lead to a functional deficit necessitating ongoing human assistance. As such, the factors that are typically taken into account in evaluating the status of applicants for LTC insurance include:

  • Age
  • Gender
  • Medical History
  • Build
  • Cognition
  • Home Environment
  • Social Support
  • Activities of Daily Living (ADLs)
  • Physical Conditions
  • Instrumental Activities of Daily Living (IADLs

The second dimension, Underwriting Requirements, relates to the specific type of information that a company needs to obtain in order to make the determination of insurability. There are multiple sources of such information. The most common tools include information provided from the application, telephone interviews, medical records or attending physician statements, medical exams, in-person assessments and pharmacy databases. When and how companies choose to deploy these tools varies greatly. By way of example, the graph below, derived from an analysis of a national survey of LTC insurance carriers, shows the frequency of use of Attending Physician Statements or Medical Records.1 As shown, there is a great deal of variation across the roughly 20 companies participating in the study. Not shown in the graph is that roughly half of all companies view medical history for up to three years whereas the other half, focus on a longer window of at least four or more years. Both underwriting criteria and requirements vary across companies.


FIGURE 1: Use of APS or Medical Records Across Companies
(2009)

Bar Chart: Review for less than 50% of applicants (23%); Review for between 51% to 74% of applicants (33%); Review for greater than 75% of applicants (44%).


In terms of the impact of underwriting on pricing, most actuaries assume that the impact of being able to select out those who are at immediate or short-term future risk will reduce anticipated claims costs during the first five to seven years after policy issue. After that time, the independent impact of underwriting on the risk profile of policyholders is assumed to diminish. Put another way, an age 65 applicant who undergoes underwriting is assumed to have superior claims experience during the first five to seven years after policy issue compared to a similarly aged individual who does not go through underwriting. However, by age 70 to 72, the anticipated claims experience of both individuals -- assuming everything else is constant -- will converge and be roughly equivalent.

The underwriting process actually begins with the development of the insurance application. Most applications typically include a number of “knock-out” questions that if answered in the affirmative, lead to an automatic declination. Such questions are focused on issues that indicate a more immediate need for term-care services. Some of the more common questions include:

  1. Do you require human assistance or supervision to perform any of your activities of daily living?

  2. Are you currently receiving home health care or have you recently been in a nursing home?

  3. Have you ever been diagnosed with, treated for, or consulted with a medical professional for the following:

    • Acquired immune deficiency syndrome (AIDS) or HIV positive, or AIDS related complications (ARC)
    • Alzheimer's disease
    • Amyotrophic lateral sclerosis (ALS or Lou Gehrig's disease)
    • Cystic fibrosis
    • Cirrhosis of the liver
    • Diabetes requiring insulin (other than during pregnancy)
    • Huntington's chorea
    • Memory loss, senility, dementia, confusion or organic brain syndrome
    • Metastatic Cancer (Cancer that has spread from the original organ)
    • Multiple sclerosis or Demyelinating disease
    • Muscular dystrophy
    • Neurogenicbladder
    • Parkinson's disease
    • Polycystic Kidney Disease
    • Post polio syndrome
    • Schizophrenia
    • Systemic lupus Erythematosus
    • Mini-stroke, transient ischemic attack (TIA), stroke, Cerebrovascular Accident (CVA)
  4. Do you currently use or need any of the following: Wheelchair, Walker, Chair/Stair lift, Oxygen, Respirator, Dialysis, Multi-pronged Cane, Motorized Cart or Hospital Bed?

  5. Do you currently receive disability benefits, Social Security disability benefits or Medicaid?

If an individuals answers in the affirmative to these questions, it is likely that they will not be able to purchase a policy.

Most policies are sold by agents and many companies provide an “Agent Guide,” which is a tool the agent uses to pre-screen potential applicants even before they complete an application. Given that the sale of LTC insurance is challenging, agents do not want to go through the trouble of taking an application and then having it rejected during the underwriting process. Therefore, a certain amount of “field underwriting” occurs. The agent guide is a tool that allows the agent to obtain some very basic information and in some sense “pre-qualify” a potential applicant. Agent guides can consist of a few pages of diagnoses that represent automatic-declines or a large booklet containing a great deal of medical underwriting information. The implication is that individuals who make application and go through the underwriting process are already a “select” group; they are the people that the agents have pre-screened into the applicant pool.2 Thus, data in subsequent analyses is not representative of the entire pool of individuals likely to apply for the CLASS program, but rather, those that are more likely to represent near term future need rather than immediate need for LTC services. This latter group will have already been screened out of the pool of applicants through agent activity.

Typically underwriting standards and protocols are considered to be a company asset and are treated confidentially. A company that is particularly strong at underwriting and able to balance sales and marketing needs with risk selection requirements is clearly at a competitive advantage in the marketplace. Thus, it is not surprising that there remains variation in the marketplace regarding precise practice. Moreover, unlike life insurance, where there is much greater experience and knowledge about factors related to mortality risks, in LTC, such knowledge is still evolving. Put simply, most LTC underwriters are hard-pressed to be able to consult a morbidity table that allows them with certainty to predict unfolding LTC needs. The need for LTC in general, and the demand for specific service modalities in particular, is characterized by the intersection between health and functional status as well as lifestyle preferences and views of family responsibility. This makes underwriting for LTC a particular challenge.

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