A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program. V. Participants

10/14/2011

Participants (also called policyholders) are calculated by multiplying the eligible population times an assumed participation rate. Participation rates are assumed to vary by age and sex. The relative value of participation rates by age and sex were obtained from the participation rates observed in the Federal Government’s and the California state government’s LTC programs. The user can adjust the average level of these rates with an input parameter. Below are participation rates for 20, 40, and 60 year olds given average participation rates of 2%, 4%, and 6%.

  Age     Average Participation  
2% 4% 6%
20 0.46% 0.53% 0.60%
40 1.29% 2.40% 3.51%
60   5.26%     11.33%     17.40%  

The eligible population is considered to be those workers aged 18 or over who earn above the required amount for participation. Workers are obtained by multiplying the US population times the labor force participation rate times one minus the unemployment rate. These calculations are performed by age, sex, and year. All of these assumptions are taken from the 2011 Trustees Report. The percentage of the workers who earn above a specified threshold is determined from data from the CPS.

Although the CLASS Act provides for a special premium for full-time students who work, the model does not take this provision of the law into account. Because students lose the right to the special premium once they are no longer students, it is assumed that the number of students taking advantage of this provision would be small.

Eligible Population

In order for a working individual to qualify for enrollment in the CLASS program, he must have earned at least an amount equal to that necessary to be credited with a quarter of coverage under the Social Security Act. In the ARC model, the income threshold for eligibility to the CLASS program can be adjusted to any level desired. The March 2009 CPS was used to obtain an income distribution of the United States labor force. This distribution contains counts of workers in various income bands by age and sex, and was used to estimate the proportion of workers who earn income greater than or equal to the defined income threshold. Once the segment of workers who fall below the income threshold is removed, the eligible population has been defined. The ARC model allows the user to set a second (higher) income threshold to determine the population eligible for a premium subsidy for low-income individuals. The law specifies that this level is the poverty line.

New Issues

CLASS program participants are calculated from the eligible population using program participation rates for each age and sex. Participation rates can be input at any level, from a fraction of 1% to 100%. Based on the data from the Federal and California LTC programs, the participation rates increase with age. Because of the 3-year work requirement, we calculate premiums up to issue age 65, although there may be a few issues at higher ages. Age limits may be entered to specify the upper and lower bounds of the individuals that may participate in the program.

The first year that individuals may participate in the CLASS program, the model calculates new issues as the assumed participation rate times the eligible population (for each age and sex separately). In all future years, the model first calculates the increase in the participation rate from each age to the next higher age. This increase in the participation rate is then multiplied by the eligible population to determine new issues.

Inforce Policies

Continuing policyholders are calculated using the mortality and lapse rates in the input assumptions for the model: the rates of survival and of lapsing on the policy are applied to the new issues and inforce policies each year to determine the policies inforce for the subsequent year. In this manner, each age cohort is “followed” in the model through to the end of life, which is assumed to be 100.

Lapses

In any insurance program, enrollees may stop making payments on a policy. When this happens, coverage terminates and the policy is said to have “lapsed.” In order to take this behavior into account, the model allows the user to input lapse rates that are used to model current enrollees who drop out of the insurance pool. The model allows the lapse rates to vary by issue age and duration.

Lapse rates in private industry have proved to be very low (often about 1% or less per year). There should be some concern regarding lapse-supported products. The assumption of lapse reduces premium levels, because much of the premiums paid in the years just after issue are not needed to pay benefits but are set aside in the form of reserves for future benefit payments. The reserve can be thought of as investment by policyholders in the policy. Once they lapse, this investment is lost and returned either to the fund or to other policyholders in the form of lower premiums. If actual lapses turn out to be less than assumed, then premiums may have to be increased. The concept of losing one’s investment upon lapse may also result in politicians creating some form of nonforfeiture benefit at a later date.

The model calculates the persistency of each cohort of policyholders from one year to the next taking into account both lapse and mortality. The persistency rate is one minus the decrement rate. Thus, the number of policyholders persisting from one year (at age x) to the next year (at age x+1) is projected according to the following formula:

P(x+1) = P(x) * (1-lr) * (1-dr)

Where:

P(x) = the number of policyholders in force at age x

lr = the lapse rate (which is specific to age at issue and duration)

dr = the death rate (which is specific to age and sex)

The number of lapses is calculated as a proportionate share of the total difference in inforce policies for an age cohort from one year to the next, i.e., P(x) – P(x+1).

Deaths

When an enrollee dies, they are removed from the insurance pool. Participant deaths are modeled based on the mortality assumptions obtained from the 2011 Trustees Report, which vary by age, sex, and year. Alternatively, mortality can start with the 2011 TR mortality table and then be trended by user specified annual rates of decline.

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