A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program. Summary of Actuarial Research Corporation’S Long-Term Care Premium Model

10/14/2011

The ARC Long-Term Care Premium Model is designed to calculate long-term care insurance premiums for a government-operated, self-financing program and to project cash flow to assist policymakers in understanding program dynamics (see Appendix L for an in-depth description of the model). It can model various CLASS benefit structures under user-selected assumptions related to: program options, economic and demographic/actuarial assumptions (including antiselection/adverse selection), and long-term care utilization. The latter two sets of assumptions do not vary according to the program options, but are parameters used in the formulas to calculate premiums. Input and output are in Microsoft Excel Worksheets with program calculations performed in Visual Basic for Applications (VBA). The computer code underlying these calculations can be viewed by simply opening Excel’s Visual Basic Editor.

The key program options that can be modeled include alternative formulations of the following provisions of the CLASS program:

  • vesting and work requirements
  • earnings requirements
  • benefit triggers
  • daily benefit amount
  • duration of benefits
  • scheduled increase in premiums (i.e., indexing to a specific percentage increase or none);
  • waiver of premium while on claim (full, partial, or none)
  • participation rate
  • administrative expense load on premiums.

Two approaches to adverse selection are built into the model: a theoretical approach and a first-year assumption regarding additional claims (a.k.a. the “first-in” method). The theoretical approach is based on a formula that assumes that adverse selection is greatest at the time of issue and declines the longer an individual is enrolled in the program. The second approach is based on observed data and an estimate of the number of people who are immediately eligible to enroll in the program and who also meet the ADL or cognitive requirement to qualify for benefits. This alternative method assumes that 100 percent of the population with limitations in ADLs or severe cognitive impairment would: (1) choose to enroll in the CLASS program the first year policies are offered, (2) survive the 5-year vesting period, (3) meet the work requirements during the vesting period, and (4) file a claim as soon as possible. After the first year in which benefits are paid, incidence rates for policyholders are assumed to be the same as general population incidence.

The model uses the 2011 OASDI Trustees Report, the Current Population Survey (CPS), the National Health Interview Survey (NHIS), the National Long-Term Care Survey (NLTCS), and the National Nursing Home Survey (NNHS). The model uses the 2011 OASDI Report and the CPS to set input parameters related to future inflation, mortality, interest rates, and labor force participation. The model uses the NHIS, NLTCS, and NNHS to estimate initial long-term care utilization by age and sex. Program options, economic and demographic/actuarial assumptions, and utilization can be saved and retrieved so that estimates can be replicated easily, and the impact of individual assumptions, or sets of assumptions, can be determined.

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