A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program. IX. Fund Operations

10/14/2011

After the premiums are calculated, the second iteration of the model simulates the operation of the trust fund for the long-term care program for an eighty-three year period, from 2012 to 2094. This is long enough for those participating at age 18 in 2012 to reach age 100. The fund output worksheet summarizes the year-by-year cash flow of the program over the long-range projection period. Income includes premiums and interest earned on the fund balance and outgo includes all benefits and administrative expenses.

The premium stream and benefit stream for new issues after 2012 are based on the projected stream for those issued policies in 2012, adjusted for the size of the new issue cohort and increases in premium and benefit levels. The projections are done separately by issue age, sex, and subsidized/unsubsidized premium groups.

In the second iteration, the number of new participants in each calendar year is determined by issue age, sex, and subsidized/unsubsidized premium group. Each new cohort is projected through time by applying death rates and lapse rates. Thus, for every calendar year, each age and each sex, the number of policies inforce is stored by the year of issue.

Premium Income

Premium income to the trust fund is based on the premiums calculated in the first iteration of the model (as opposed to a $1 premium). In the first iteration, premiums are determined for each issue age for new policy issues in 2012 (the first year of premium payments) for those in the low-income and the unsubsidized income groups. For those who are issued policies in 2012, these initial premiums are indexed according to user specifications (i.e., no indexing, indexing for life, or indexing up to some specified age and / or duration). For those who are issued new policies after 2012, the premiums calculated for 2012 are indexed up to the new issue year at the same rate as benefits are indexed (reflecting the higher benefit payments for each new year of issue) and then indexed after the new issue year in the same manner as specified by the user in the policy options.

Aggregate (or total) premium payments in each calendar year are then the result of the sum product of the number of premium payers classified by issue age, issue year, and subsidized/unsubsidized times the appropriate annual premium level.

Benefit Outgo

For each calendar year, the first iteration of the model calculates by issue age, sex, and subsidized/unsubsidized premium groups the number of new claims, the number of beneficiaries on claim, and the amount of benefit payments for those in a nursing home and those in home care. In the second iteration of the model, these numbers are used to project the cash flow for subsequent cohorts, adjusted for the size of each cohort and the indexing of benefit levels.

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