The State Worker

1996 report warned CalPERS about long-term care insurance pricing

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This week’s State Worker column looks at the latest turn in a lawsuit against CalPERS by long-term care insurance policyholders and references a prescient 19-year-old analysis of troubles the fund might face.

The plaintiffs say CalPERS and its business agents promised that premiums for lifetime, inflation-adjusted coverage would never increase. After several incremental hikes over the years, CalPERS this year raised rates by up to 85 percent for those open-ended plans, with a similar increase planned for next year. Fund officials have said the price hikes are needed to stabilize funding for those Cadillac plans.

Policy pricing was an area of concern for actuaries who wrote the 1996 “second opinion” assessment just one year after CalPERS launched the insurance program, which covers nursing home care and similar services. The review by Coopers Lybrand LLP suggests that the fund priced policies unnecessarily low and overestimated its ability to earn an 8 percent rate of return on long-term care fund investments.

As the report makes clear, the nascent long-term care industry in the mid-1990s was still struggling to correctly price coverage. CalPERS has said that it relied on the best estimates available at the time and that its experience since then aligns with what has happened in the long-term care insurance industry overall.

Still, page 12 of the 1996 report forecast that CalPERS faced unique challenges:

▪ “You have great visibility. What you do with future premiums will be noticed by many, probably more than the actions of other individual insurers.”

▪ “Your product’s premiums are very favorable compared to the market, significantly lower than fully insured plans. Any future premium rate increase for in-force members will be subject to some criticism that you ‘low-balled’ premiums to attract sales, with the intent – or at least the willingness – to make future increases.”

▪ Since CalPERS board controls premium rates, it would be “subject to pressure from appeals of groups and individuals ... ”

▪ “It is also difficult for any board to fully understand a new and uniquely complex product such as LTC insurance.”

▪ While commercial insurers keep reserves as a “buffer” against shortfalls in pricing, CalPERS didn’t. If premiums and investments didn’t cover the bills, “there is nowhere else to go to get money.”

▪ “CalPERS is truly caring and well motivated for its members. It will be less likely than some insurance company competitors to make the short term tough decision to raise rates. If not done when it should be, subsequent analysis will reveal greater financial harm and present an even more difficult decision to raise them at that time.”

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