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Locked into high LTCI rates

W

Walter Pearson

Member
Hi guys

Referring to chapter 3 , page 21, second paragraph:
“Given that almost all premiums are based on the policyholders age at entry and on the risk of health deterioration, policyholders may be locked into unnecessarily higher rates....”

Q
How does the age at entry influence the value of the guarantee for the policyholder? Age at entry is fixed for guaranteed and reviewable contracts.
I guess the question is : If the premium was reviewable, how would the premium have been lower because of age at entry?

Or are they just mentioning the age at entry for giggles, i.e. we are just supposed to focus on health deterioration :)
 
The topic basically relate to the guaranteed terms . It explains that guaranteed premiums would be excessively large due to regulatory constraints and pricing uncertainties . So if premiums are not review-able the PH would pay higher guranteed premium even if experience turn out to be favorable .
 
I do understand the topic. I am just bad at asking things clearly :)

If you examine the sentence, it states that "...age at entry...and risk of health deterioration..."

my question is :
Why is age at entry of any relevance to the topic you just confirmed...
 
My take on this is.....

If the policyholder takes out the LTCI policy at a younger age and they have guaranteed premiums this potentially means they are locked in to those higher rates for longer than a policyholder who starts the policy at an older age. As mentioned in a previous post, LTCI premiums are loaded because there is lots of uncertainty about what future claims experience. And there would be even more uncertainty if a polcyholder is younger (they could start claiming fairly soon and be claiming for a long time). So, the premiums are likely to be high and cannot be changed once the policy is inforce.

If you compare this with a policyholder who takes out cover when they are older with reviewable premiums. The policyholder is more likely to be paying premiums that reflect the expected claims experience as there will be less uncertainty because they are older and the insurer can adjust premiums if their experience is worse than expected. So, they are not locked in to high rates.
 
I get it thanks Tommy!

Even though we might not use age at entry specifically when working out reviewed premiums (which I thought was stated in the notes somewhere but couldn't find it now...),

the fact that we used age at entry when we did the guaranteed premium,

had the effect of adding much more margin than just due to the age at entry because of future uncertainty and the young age...

that makes sense to you?

I think that when I do the pricing chapter it will make perfect sense...so me gonna let this go now... :)
 
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