A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program. Increasing Premiums

10/14/2011

Long-term care insurance claim patterns are typically characterized by very few claims in the early years of a program and a significantly higher number of claims in the later years. Level premiums develop a relatively high fund balance in the early years when premiums exceed claims and expenses. This relationship reverses in later years.

For the CLASS Program, an increasing premium schedule provides several advantages:

  1. Increasing premiums make the initial premiums lower than the corresponding level premiums. This may result in higher enrollments. This, in turn, increases the spread of risk and improves the chance for program sustainability.

  2. An increasing premium plan provides less inflow to the trust fund in the early years than a level premium plan. The Program is subjected to less investment risk in matching the cash flow from assets with the cash flow from claim and expense obligations. Lower cash inflow also places less reliance on the expected relatively moderate fund returns available to the CLASS Program which is limited to an investment portfolio of Treasury Securities.

  3. As increasing premium schedules are still uncommon in private insurance, they could give the CLASS Program a temporary competitive advantage.

From the enrollees’ perspective, an increasing premium schedule starts out significantly lower than the corresponding level premium but eventually exceeds it in later years. Lower initial premiums mean more efficient use of enrollees’ discretionary dollars. Premiums go up relatively in line with increases in plan benefits and general wages. Also, if enrollees decide to lapse, their cumulative outlays would be less than their cumulative outlays for level premiums for the same period of coverage. However, a potential disadvantage of an increasing premium schedule is that enrollees may not be able to afford the premiums in their later years when the enrollees’ income is relatively fixed. This can be addressed by exempting enrollees from scheduled premium increases after a certain age or period of enrollment.

One method of implementing an increasing premium schedule is to index the premium by the CPI in the same manner as the daily benefit amount increases by the index. This has the undesirable feature of ever-increasing premiums beyond the retirement years. Also, there will be uncertainty each year regarding the amounts of future increases.

We propose an increasing premium schedule with a 4% compounded annual increase that stops at age 70 (or after 5 years of enrollment, whichever is later). Premiums are level thereafter38. The 4% is chosen to provide an attractive entry price point to most enrollees. Other increasing premium schedules, such as indexing up to a specific age, are also under consideration.

After enrollment, if an enrollee finds the increasing premium schedule unaffordable, the enrollee will have the option to freeze future premium increases with a corresponding freeze in benefits. However, if premiums need to increase for other reasons (not related to the set annual increase), enrollees who have frozen their premiums will still be subject to those increases.

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