A. Background on Long-Term Care Underwriting
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:
- Medical History
- 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
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:
Do you require human assistance or supervision to perform any of your activities of daily living?
Are you currently receiving home health care or have you recently been in a nursing home?
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
- Parkinson's disease
- Polycystic Kidney Disease
- Post polio syndrome
- Systemic lupus Erythematosus
- Mini-stroke, transient ischemic attack (TIA), stroke, Cerebrovascular Accident (CVA)
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?
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.
B. Underwriting Declination Rates by Age
In 2009, underwriting rejection rates across the industry were at 19.4%. As shown in Figure 2 below, declination rates are highly sensitive to age. This data is based on a recently completed survey of 21 LTC insurance companies representing the vast majority of sales in 2009. For applicants under age 45, declination rates are below 10% whereas for those over age 80, rates increase to slightly more than two in five or 44%. This is not surprising given that functional and cognitive decline -- and associated need for LTC services -- is related to age.
FIGURE 2: Underwriting Declination Rates by Age
Source: Results of the Long-Term Care Underwriting Survey for the Individual Market in 2009. LifePlans, Inc. Waltham, MA. November, 2010.
Note: Data weighted to represent market share of participating companies.
If we compare the age profile of individuals unable to purchase insurance due to health reasons with those who were issued policies during the same period, we find that the former tend to be older. In fact, the average age of individuals declined for coverage in the underwriting process in 2009 was 64 years whereas the average age of new purchasers was 57 years.
FIGURE 3: New Policy Issues and Declinations by Age
C. Socio-Demographic, Functional, and Cognitive Characteristics of Individuals Declined from Purchasing LTC Insurance
Table 2 summarizes additional socio-demographic characteristics of individuals who were declined from purchasing LTC insurance compared to individuals who were issued policies. As shown, compared to new buyers, declined individuals tend to be somewhat older, more male, and much less likely to be employed. Regarding employment, the results suggest that in general, being employed -- which is also typically correlated with younger ages -- is negatively associated with underwriting declinations. The implication is that as a potential underwriting screen, the employment requirement does provide some level of protection.
As mentioned, companies tend to focus on the medical, functional and cognitive status of individuals when deciding whether or not to issue a policy. Figure 4 below shows the percentage of individuals who were declined due to a functional or cognitive impairment.
FIGURE 4: Percentage of Applications Declined Due to Functional and Cognitive Issues
Clearly, agents are doing a good job in terms of pre-screening; only 2% of applicants present with ADL or IADL limitations. As well, individuals with current dementia are for the most part screened out of the applicant pool by agents. For the most part, the 8% of applicants who are declined due to cognitive impairment, are not yet exhibiting outward signs of dementia, but instead, are at the very earliest stages of cognitive decline.
Table 3 shows the relationship between age and various socio-demographic characteristics of individuals not able to purchase a policy due to health issues. Each age grouping is assigned a letter so that in the table itself, one can identify those variables which are significantly different from similar variables in other age groups. Thus, for example, the percentage of female declines in the under age 60 age group is significantly higher than what is found in the 60-69 and over 70 age groups. The key findings from the data are that:
Although relatively small, there is a higher percentage of individuals in the over age 70 group who are declined from insurance due to ADL and IADL limitations.
The rate of declines due to cognitive impairment is less than 2% for the under age 60 group, but more than one-in-four (27%) for the over age 70 group.
The rate of employment among declines is 74% for the under age 60 group and 26% for the over 70 age group.
D. Profile of Declines by Medical Diagnoses
In explaining to applicants why they may have been declined from insurance, almost all companies point to the presence of specific medical diagnoses. This is the case even when such diagnoses may not have yet manifested themselves into functional or cognitive decline. It is enough for an underwriter to know that such diagnoses will likely lead to dependency in ADLs to screen the individual out of the risk pool. The analysis of diagnostic information highlights the fact that the diagnoses that are recorded in the case files of applicants are many and varied. In order to assure that a profile could be developed, clinical underwriters reviewed the diagnostic information provided by companies and developed a common basis for coding diagnoses into any one of thirteen primary categories. Figure 5 shows the distribution of the declined applicants by these primary categories.
FIGURE 5: Distribution of Underwriting Declines by Medical Diagnosis
Note: “Other” is comprised of Dementia, Parkinson’s disease, current use of Durable Medical Equipment, ADL or IADL impairments, use of specific excluded drugs, soft-tissue issues.
As shown, there is a wide distribution of diagnoses that can lead to an underwriting decline. No single diagnostic category accounts for more than 15% of declines. The most prevalent categories include neurological issues, fractures, bones and musculoskeletal issues, cardiac problems and individuals presenting with multiple conditions. Roughly 6% of declines are comprised of individuals with mental health issues, the most common being depression.
Table 4 highlights the relationship between medical diagnoses and age. Key findings from this table include:
Individuals age 70 and over are most likely to be declined because of neurological problems other than Parkinson’s and the presence of multiple conditions.
Diabetes, Endocrine, Cancer and Cardiac problems are the most prevalent reasons for declines for individuals in the age 60-69 age group.
Fractures, bone issues and other musculoskeletal problems, as well as mental health, auto-immune and other diagnoses not captured by these other major categories are most prevalent in the under age 60 declines.
E. Profile of Declines by Employment Status
While the CLASS Program is structured in a manner that maximizes participation -- even among those who already may have functional dependencies -- the one requirement that does afford some level of control regarding enrollment is the work requirement. To enroll in the program, an individual must be employed. Therefore, if one wants to obtain a profile of likely early enrollees to the program, a focus on the sub-set of employed individuals declined for private LTC insurance is clearly warranted. This group is already educated about the risk and need for coverage, has expressed its preferences through a willingness to pay for private insurance, and is likely to be highly motivated to participate in a public program, even if benefits levels are less than what they might have desired in the private market. In the analyses that follow, we segment data in terms of employment status. We have definitive employment status on roughly 18,500 declines.
As mentioned, many companies do not track in their system whether or not an applicant is employed. We do know from previous studies of buyers and non-buyers of LTC insurance that roughly 70% of all applicants for LTC insurance are employed. Tables 2 and 4 highlighted the fact that the rate of employment among individuals declined for insurance is much lower than for the population of applicants as a whole, at least with respect to those ages 60 and over.
Table 5 shows the relationship between key demographic characteristics of the sample by employment status. As shown, employed declines are more likely to be younger, male, and married, but less likely to have functional or cognitive issues than their non-employed counterparts.
Not shown in the table is the fact that employed applicants who were declined due to health status are slightly older (age 60) than are all employed applicants (age 58). Moreover, they tend to be somewhat more male (54%) than the total pool of all employed applicants (45%).
Table 6 summarizes the relationship between employment status and primary diagnosis among declines. The only statistically significant differences in the medical diagnosis profile between the two groups are that mental health issues and stroke/CVA/Circulatory problems are more prevalent among those not working. Among those employed, there is a somewhat higher proportion of individuals with a myriad of other diagnoses which are reflected in the “Other” category.
Clearly, one’s medical status is closely related to age. To gain a better understanding of the relationship between primary diagnoses and age, Table 7 arrays the data by age, employment status and diagnosis.
The key observations from this table are that:
Among declines under age 60, mental health is more prevalent than for other age groups and it is also highly correlated with employment status: those who are not-working are roughly twice as likely to have mental health issues cited as a primary reason for a decline and this is true across all age segments.
Fractures/Bone Problems/Musculoskeletal issues as well as Auto-immune issues are more prevalent among the under age 60 employed declines than among other age groups.
Diabetes and Endocrine problems are most prevalent among employed individuals age 60-69. Also, individuals age 60-69 who are employed are more likely to have cardiac issues than are those who are not-employed.
Among individuals age 70 and over, Stroke, CVA/ Circulatory issues, along with Neurological and Cardiac problems comprise the major reasons for decline. Neurological problems are more prevalent among the employed.
Table 8 below further segments the data by focusing on age and gender differences in the profile of medical diagnoses for individuals who are employed and were declined coverage.
Key observations from Table 8 include:
Under age 70, among employed applicants, males tend to have higher rates of Diabetes/Endocrine, Stroke/CVA/Circulatory, and Cardiac problems than do females.
Across all ages, mental health and auto-immune issues as primary decline reasons among employed individuals are higher for females than for males.