A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program. Pricing Risks

10/14/2011

It should be noted that long-term care insurance programs are characterized by low incidence rates and relatively high benefit amounts. Claim costs are typically low at the early ages of the enrollees but increase substantially at later ages beyond retirement. The typical time to claim from enrollment is over 10 years. Consequently, small changes in assumptions regarding future events will have a large effect on premiums. As experience from private long-term care insurance has revealed, the likelihood for misjudging future costs is significant.

Even though efforts will be made to mitigate adverse selection and to use private group insurance data as a base for claim assumptions, several mispricing opportunities remain:

  • The impact of adverse selection for the CLASS Program may not be identical to that for guaranteed issue group long-term care insurance.
  • Long-term interest return and future benefit inflation rate are difficult to forecast.
  • The induced demand due to payments to family members, especially spouses, is largely unknown.
  • The additional claims due to Temporary Exclusion over the base claim assumption has not been quantified.
  • The $5 subsidized premium has not been completely removed.
  • Possibilities exist for organized efforts to enroll workers with functional limitations.

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