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NAIC: LTC blocks to be held to more robust, uniform reserve standards

The National Association of Insurance Commissioners has adopted a new actuarial guideline to apply to the calculation of long-term care insurance reserves so state regulators can better evaluate the solvency of companies with sizable LTC blocks.

The practice could potentially require some companies, whether they have closed or open blocks of LTC business, to up their reserves if the required analysis reveals a reserve deficiency.

The NAIC voted last week to adopt the new guideline after months of discussion among subgroups. State insurance regulators had voiced concern over a lack of uniformity in reserve adequacy.

The current reserve adequacy testing "does not provide comfort on closed blocks of business," said Maryland Insurance Commissioner Al Redmer in proposing adoption of the new guidance at the meeting. Redmer heads the NAIC's executive-level task force on LTC, created earlier this year. Closed blocks represent more than 55% of earned premiums and roughly 60% of cumulative total claims paid, according to a May 2016 research paper from the NAIC and its Center for Insurance Policy and Research.

In addition to requiring a uniform approach to actuarial assumptions on a company's potential to get future LTC premium rate increases, the NAIC wants to better understand whether current LTC reserves are adequate.

The guidance includes new requirements for insurers to document their actuarial assumptions associated with all key LTC risks and their testing results. For instance, companies' premium rate increase assumptions must not be pie-in-the-sky hopes but ones that have been approved by management and are highly likely to be undertaken and approved by regulators. Regulators made clear in the NAIC guideline language that they want to see documentation of this.

The new guidance instructs insurers to conduct their asset adequacy analysis either in the form of a gross premium valuation or in a "more robust" way, such as through cash-flow testing, according to NAIC committee work materials. Unlike the gross premium valuation method, cash-flow testing allows a reserve deficiency in one LTC block to be offset by another.

The new guideline is effective for reserves reported with the Dec. 31, 2017, financial statement and all subsequent statements. It applies to any company with over 10,000 in-force lives covered by LTC insurance contracts, whether directly written or assumed through reinsurance. The new guideline is not expected to result in significant reserve increases for year-end 2017, but could lead to increased reserves for year-end 2018 and beyond, according to actuaries familiar with the guidance.

The new guideline has already been adopted by the NAIC's Health Insurance and Managed Care Committee, and the Health Actuarial Task Force.