SECTION 3.3831. Standards and Rates

(a) Loss ratio standards. Except as noted in subsections (b) and (c) of this section, this subsection shall apply to all long-term care insurance policies and certificates.

(1) Benefits provided under long-term care insurance policies and certificates shall be deemed reasonable in relation to premiums charged if the expected loss ratio is at least 60%, calculated in a manner which provides for adequate reserving of the long-term care insurance risk. In evaluating the expected loss ratio, due consideration shall be given to all relevant factors, including:

(A) statistical credibility of incurred claims experience and earned premiums;

(B) the period for which rates are computed to provide coverage;

(C) experienced and projected trends;

(D) concentration of experience within early policy duration;

(E) expected claim fluctuation;

(F) experience refunds, adjustments, or dividends;

(G) renewability features;

(H) all appropriate expense factors;

(I) interest;

(J) experimental nature of the coverage;

(K) policy reserves;

(L) mix of business by risk classification; and

(M) product features such as long elimination periods, high deductibles, and high maximum limits.

(2) Prior to the use of any long-term care policy or certificate form in this state, every insurer shall submit to the commissioner an actuarial memorandum for each such policy which includes claim experience data and assumptions made thereon to sufficiently explain how the rates for such policy form are calculated. The actuarial memorandum submitted shall at least provide information which includes premium rate tables and/or schedules for each risk class and any fees, assessments, dues, or other considerations that will be included in the premium.

(b) Initial premium rate filing.

(1) Sixty days prior to the use of any long-term care policy or certificate to be issued in this state on or after July 1, 2002, an insurer shall submit the following information to the department:

(A) a copy of the disclosure form required by §3.3829(b) of this subchapter (relating to Required Disclosures);

(B) an actuarial memorandum or certification which includes at least the following:

(i) a statement that the initial premium rate schedule is sufficient to cover anticipated costs under moderately adverse experience and that the premium rate schedule is reasonably expected to be sustainable over the life of the form with no future premium increases anticipated;

(ii) a statement that the policy design and coverage provided have been reviewed and taken into consideration;

(iii) a statement that the underwriting and claims adjudication processes have been reviewed and taken into consideration;

(iv) a complete description of the basis for contract reserves that are anticipated to be held under the form, to include:

(I) sufficient detail or sample calculations provided so as to have a complete depiction of the reserve amounts to be held;

(II) a statement that the assumptions used for reserves contain reasonable margins for adverse experience;

(III) a statement that the net valuation premium for renewal years does not increase (except for attained-age rating where permitted); and

(IV) a statement that the difference between the gross premium and the net valuation premium for renewal years is sufficient to cover expected renewal expenses; or, if such a statement cannot be made, a complete description of the situations where this does not occur. The description may include a demonstration of the type and level of change in the reserve assumptions that would be necessary for the difference to be sufficient;

(-a-) an aggregate distribution of anticipated issues may be used as long as the underlying gross premiums maintain a reasonably consistent relationship;

(-b-) if the gross premiums for certain age groups appear to be inconsistent with this requirement, the department may request a demonstration under paragraph (2) of this subsection based on a standard age distribution; and

(v) either a statement or comparison as follows:

(I) a statement that the premium rate schedule is not less than the premium rate schedule for existing similar policy forms also available from the insurer except for reasonable differences attributable to benefits; or

(II) comparison of the premium schedules for similar policy forms that are currently available from the insurer with an explanation of the differences. An insurer will not be required to provide a comparison of every age and set of benefits, period of payment or elimination period; instead, a broad range of expected combinations designed to provide a fair presentation is to be provided.

(2) The department may request, and the insurer shall provide, at any time, an actuarial demonstration that benefits are reasonable in relation to premiums. If requested:

(A) the actuarial demonstration shall include either premium and claim experience on similar policy forms, adjusted for any premium or benefit differences, relevant and credible data from other studies, or both; and

(B) the period in subsection (b)(1) of this section does not include the period during which the insurer is preparing the requested information.

(c) Premium rate schedule increases. This subsection applies to premium rate increases for any long-term care policy or certificate delivered or issued for delivery in this state on or after July 1, 2002, except for certificates under a group long-term care insurance policy issued to one or more employers or labor organizations, or to a trust or to the trustees of a fund established by one or more employers or labor organizations, or a combination thereof, for employees or former employees or a combination thereof or for members or former members or a combination thereof, of the labor organizations, which was in force on July 1, 2002, the provisions of this section shall apply on the policy anniversary following January 1, 2003.

(1) Exceptional premium rate increases.

(A) Exceptional premium rate increases are subject to the requirements of paragraph (2) of this subsection in addition to subparagraphs (B) and (C) of this paragraph.

(B) The department may request a review by an independent qualified actuary or a professional actuarial entity of the basis for a request that an increase be considered an exceptional premium rate increase.

(C) The department, in determining that the necessary basis for an exceptional premium rate increase exists, shall determine any potential offsets to higher claims costs.

(2) All premium rate schedule increases.

(A) An insurer shall submit a pending premium rate schedule increase, including an exceptional premium rate increase, to the department not later than the 60th day preceding the date of the notice to the policyholders, and shall include:

(i) information required by §3.3829(b) of this subchapter;

(ii) certification by a qualified actuary that:

(I) no further premium rate schedule increases are anticipated if the requested premium rate schedule increase is implemented and the underlying assumptions, which reflect moderately adverse conditions, are realized;

(II) the premium rate filing is in compliance with the provisions of this section;

(iii) an actuarial memorandum justifying the rate schedule increase request that includes:

(I) lifetime projections of earned premiums and incurred claims based on the filed premium rate schedule increase and the method and assumptions used in determining the projected values, including reflection of any assumptions that deviate from those used for pricing other forms currently available for sale, subject to the following:

(-a-) annual values for the five years preceding and the three years following the valuation date shall be provided separately;

(-b-) the projections shall include the development of the lifetime loss ratio, unless the rate increase is an exceptional increase;

(-c-) the projections shall demonstrate compliance with subparagraph (B) of this paragraph; and

(-d-) for exceptional premium rate increases:

(-1-) the projected experience shall be limited to the increases in claims expenses attributable to the approved reasons for the exceptional premium rate increase; and

(-2-) in the event the department determines, as provided in paragraph (1)(C) of this subsection that offsets may exist, the insurer shall use appropriate net projected experience;

(II) disclosure of how reserves have been incorporated in this rate increase whenever the rate increase will trigger contingent benefit upon lapse;

(III) disclosure of the analysis performed to determine why a rate adjustment is necessary, which pricing assumptions were not realized and why, and what other actions taken by the insurer have been relied on by the actuary; and

(IV) a statement that policy design, underwriting and claims adjudication practices have been taken into consideration;

(V) composite rates reflecting projections of new certificates in the event that it is necessary to maintain consistent premium rates for new certificates and certificates receiving a rate increase;

(iv) a statement that renewal premium rate schedules are not greater than new business premium rate schedules except for differences attributable to benefits, unless sufficient justification is provided to the department; and

(v) sufficient information for review of the premium rate schedule increase by the department.

(B) All premium rate schedule increases shall be determined in accordance with the following:

(i) exceptional premium rate increases shall provide that 70% of the present value of projected additional premiums from the exceptional premium rate increase will be returned to policyholders in benefits;

(ii) premium rate schedule increases shall be calculated such that the sum of the accumulated value of incurred claims, without the inclusion of active life reserves, and the present value of future projected incurred claims, without the inclusion of active life reserves, will not be less than the sum of the following:

(I) the accumulated value of the initial earned premium multiplied by 58%;

(II) 85% of the accumulated value of prior premium rate schedule increases on an earned basis;

(III) the present value of future projected initial earned premiums multiplied by 58%; and

(IV) 85% of the present value of future projected premiums not in subclause (III) of this subparagraph on an earned basis;

(iii) If a policy form has both exceptional premium rate increases and other increases, the values in subclauses (II) and (IV) of clause (ii) of this subparagraph will also include 70% for exceptional rate increase amounts; and

(iv) All present and accumulated values used to determine rate increases shall use the maximum valuation interest rate for contract reserves as specified in Subchapter GG of this chapter. The actuary shall disclose as part of the actuarial memorandum the use of any appropriate averages.

(C) For each rate increase that is effected, the insurer shall file for review by the department updated projections, as defined in paragraph (2)(A)(iii)(I) of this subsection, annually for the next three years on the anniversary of the implementation of the rate increase, and shall include a comparison of actual results to projected values. The department may extend the period for filing updated projections to more than three years if actual results are not consistent with projected values from prior projections submitted by the insurer. For group insurance policies that meet the conditions in subparagraph (K) of this paragraph, the projections required by this paragraph shall be provided to the policyholder in conjunction with filing the projections with the department.

(D) If any premium rate in the revised premium rate schedule is greater than 200% of the comparable rate in the initial premium schedule, the insurer shall file for review by the department, every five years following the end of the required period in subparagraph (C) of this paragraph, lifetime projections, as defined in paragraph (2)(A)(iii)(I) of this subsection. For group insurance policies that meet the conditions in subparagraph (K) of this paragraph, the projections required by this paragraph shall be provided to the policyholder in conjunction with filing the projections with the department.

(E) If the department determines that the actual experience following a rate increase does not adequately match the projected experience filed by the insurer and that the current projections under moderately adverse conditions demonstrate that incurred claims will not exceed proportions of premiums specified in subparagraph (B) of this paragraph, the department may require the insurer to implement any of the following:

(i) premium rate schedule adjustments; or

(ii) other measures to reduce the difference between the projected and actual experience.

(F) In determining whether the actual experience adequately matches the projected experience under subparagraph (E) of this paragraph, consideration shall be given to paragraph (2)(A)(iii)(V) of this subsection, if applicable.

(G) If the majority of the policies or certificates to which the increase is applicable are eligible for the contingent benefit upon lapse, the insurer shall file:

(i) a plan, subject to the department's approval, for improved administration or claims processing designed to eliminate the potential for further deterioration of the policy form requiring further premium rate schedule increases, or both, or to demonstrate that appropriate administration and claims processing have been implemented or are in effect; otherwise the department may impose the condition in subparagraph (H) of this paragraph; and

(ii) the original anticipated lifetime loss ratio, and the premium rate schedule increase that would have been calculated according to subparagraph (B) of this paragraph had the greater of the original anticipated lifetime loss ratio or 58% been used in the calculations described in paragraph (2)(B)(ii)(I) and (III) of this subsection.

(H) For a rate increase filing that meets the criteria in clauses (i) - (iii) of this subparagraph, the department shall review, for all policies included in the filing, the projected lapse rates and past lapse rates during the 12 months after the date each increase becomes effective to determine if significant adverse lapsation has occurred or is anticipated:

(i) the rate increase is not the first rate increase requested for the specific policy form or forms;

(ii) the rate increase is not an exceptional premium rate increase; and

(iii) the majority of the policies or certificates to which the increase is applicable are eligible for the contingent benefit upon lapse.

(I) In the event significant adverse lapsation has occurred, is anticipated in the filing, or is evidenced in the actual results as presented in the updated projections provided by the insurer after the date of the requested rate increase, the department may determine that a rate spiral exists. Following the determination that a rate spiral exists, the department may require the insurer to offer to all in force insureds subject to the rate increase, without underwriting, the option to replace existing coverage with one or more reasonably comparable products being offered by the insurer or its affiliates.

(i) The offer shall:

(I) be subject to the approval of the department;

(II) be based on actuarially sound principles, but not be based on attained age; and

(III) provide that maximum benefits under any new policy accepted by an insured shall be reduced by comparable benefits already paid under the existing policy.

(ii) The insurer shall maintain the experience of all the replacement insureds separate from the experience of insureds originally issued the policy forms. In the event of a request for a rate increase on the policy form, the rate increase shall be limited to the lesser of:

(I) the maximum rate increase determined based on the combined experience; and

(II) The maximum rate increase determined based only on the experience of the insureds originally issued the form plus 10%.

(J) If the department determines that the insurer has exhibited a persistent practice of filing inadequate initial premium rates for long-term care insurance, the department may, in addition to the provisions of subparagraph (H) of this paragraph, prohibit the insurer from any of the following:

(i) filing and marketing comparable coverage for a period not to exceed five years; or

(ii) offering all other similar coverages and limiting marketing of new applications to the products subject to recent premium rate schedule increases.

(K) Subparagraphs (E), (H) and (I) of this paragraph shall not apply to group insurance issued to one or more employers or labor organizations, or to a trust or to the trustees of a fund established by one or more employers or labor organizations, or a combination thereof, for employees or former employees or a combination thereof or for members or former members or a combination thereof, of the labor organizations, where:

(i) the policies insure 250 or more persons, and the policyholder has 5,000 or more eligible employees of a single employer; or

(ii) the policyholder, and not the certificate holders, pays a material portion of the premium, which shall be not less than 20% of the total premium for the group in the calendar year prior to the year during which a rate increase is filed.

Source Note: The provisions of this §3.3831 adopted to be effective February 15, 1990, 15 TexReg 544; amended to be effective July 20, 1992, 17 TexReg 4769; amended to be effective May 8, 1997, 22 TexReg 3786; amended to be effective January 6, 2002, 26 TexReg 10886