A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program. VI. Trust Fund Income (Premium Payments and Interest)

10/14/2011

The model simulates trust fund operations over the period from 2012 to 2094. Several properties of the fund are tracked and reported by year to illustrate fund activity. Total fund income is calculated each year as the sum of premiums collected and interest income. Fund expenditures for each year are calculated as the sum of benefit payments and administrative expenses. The increase in the fund for the year is measured as the fund income less fund expenditures, and this amount is added to the fund balance from the beginning of the calendar year to obtain the end of year balance.

Premium income is calculated as the sum of all premiums paid by inforce members for a given year. The model varies premiums by issue age, issue year, and income status. According to the CLASS Act, premiums may be specific to an individual if he has lapsed for more than 3 months and then reenrolled. The model does not take this behavior into account. Premiums for the first year of issue (i.e., 2012) are calculated for each cohort (i.e., each issue age) by projecting benefit payments and premium payments for each year until the end of life (assumed to be age 100).

Once the premiums are estimated by age for the first year of issue, they are projected for new issues in future years at the same rate as the increase in benefit levels (which is the CPI-U for the CLASS Act). This assumption ignores trends in any other factors, such as: mortality, utilization rates, and participation rates. Because premiums vary by age and issue year, the number of policies inforce is tracked by age and issue year as well. Thus, premium income for each year the program is equal to the number of premium-paying policyholders in a given year (remember some policyholders in claim status may have premiums waived) disaggregated by year of issue and age at issue times the appropriate premium. Thus, the general formula for premium income is calculated according to the following formula summed over all issue years and issue ages:

PI(ia, dur) = PRM(ia, iy) * (1 + prm index) ^ dur * number of premium payers

When there is a low-income subsidized premium, then the above formula is applied separately to the low-income participants using the low-income premium.

Interest income is calculated as the interest rate for a given year multiplied by the starting fund plus half of the change in fund balance (income – expenditures). This assumes that program income is uniformly distributed by month over the course of each year.

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