RULES AND REGULATIONS
Title 31--INSURANCE
INSURANCE DEPARTMENT
[31 PA. CODE CHS. 89 AND 89a]
Long-Term Care Insurance
[32 Pa.B. 1475] The Insurance Department (Department) deletes Chapter 89, Subchapter M and adds Chapter 89a (relating to long-term care insurance model regulation) to read as set forth in Annex A. Chapter 89a sets forth the requirements for the content and filing of long-term care insurance form and rate filings.
Statutory Authority
The rulemaking is adopted under the authority contained in sections 206, 506, 1501 and 1502 of The Administrative Code of 1929 (71 P. S. §§ 66, 186, 411 and 412) and sections 1101--1115 of The Insurance Company Law of 1921 (act) (40 P. S. §§ 991.1101--991.1115).
Comments and Response
Notice of proposed rulemaking was published at 31 Pa.B. 5553 (October 6, 2001) with a 30-day comment period. During the 30-day comment period, comments were received from Independence Blue Cross (IBC), the Insurance Federation of Pennsylvania, Inc. (IFP), the Independent Insurance Agents of Pennsylvania, the Pennsylvania Association of Insurance and Financial Advisors and the Pennsylvania Association of Health Underwriters (AGENTS).
On December 6, 2001, as part of its regulatory review, the Independent Regulatory Review Commission (IRRC) submitted comments to the Department. The following is a response to those comments.
Rather than listing the sections of the regulations where commentators expressed their full support, the Department would like to express its sincere thanks to those commentators for supporting the regulations.
Section 89a.103. Definitions.
The AGENTS noted that the terms ''producer,'' ''agent'' or ''broker'' are all used throughout various sections in the regulations. It was recommended that the term ''producer'' be used throughout the regulations. The AGENTS further noted that the term ''producer'' should be redefined as, ''a licensee that solicits, sells or negotiates an insurance product.''
IRRC noted that the term ''producer'' was defined, yet the regulations contained reference to the terms ''agent'' and ''broker.'' Therefore, the term ''producer'' needs to be used consistently throughout the regulations and the terms ''agent'' and ''broker'' should be replaced with ''producer.''
The Department agrees and has made the change as requested to use the term ''producer'' consistently throughout the regulations. However, the Department has retained the current definition as it cites current statutory law.
Defintions of ''exceptional increase''
The AGENTS commented that the wording was somewhat unclear and the criteria for approving premium schedule rate increases is not clearly spelled out in the regulation. They suggested the following substitution:
''Rate increases. Those increases in premiums for long-term care policies, which are either schedule rate increases or exceptional rate increases.
(a) Schedule rate increases are those premium increases approved by the Commissioner when . . . (list the conditions under which a schedule rate increase may occur.)
(b) Exceptional increases are those premium increases deemed by the Commissioner to be outside of the scope of schedule rate increases and based on justification that:
(i) Due to changes in laws and regulations . . .
(ii) Due to increased and unexpected utilization . . .
(iii) Except as substantiated by an actuarial review requested by the Commissioner.''
The Department has taken the language from the National Association of Insurance Commissioners (NAIC) Long-Term Care Insurance Model Regulation (Model) and believes that the language is sufficiently clear both in the definition and as well as in § 89a.118 (relating to premium rate schedule increases). No change was made.
Section 89a.104. Policy definitions.
Definition of ''bathing''
The IFP stated that the various components of the activities of daily living are essential to triggering benefits under long-term care policies and any variation from state to state would cause administrative problems. Several IFP members noted that in the definition of ''bathing'' in § 89a.104, the Department has added to the NAIC Model definition the phrase, ''. . . or drawing the water for a sponge bath and getting the equipment to the person or the person to the equipment.''
The IFP believed that this is a complicating addition for several reasons. First, it implies that some element in this Commonwealth differs from the understanding of insurers around the country about this term. Presumably, getting to and from the bathing location and equipment is an integral part of being able to wash oneself. Second, the introduction of the capabilities of a second person who may be bringing the person to the equipment or the equipment to the person is simply confusing. Individuals cannot acquire an Activity of Daily Living (ADL) from a caregiver.
The IFP believed that unless there is some major need for this additional phrase, it should be deleted, staying with the NAIC Model's definition.
IRRC also had concerns with the term ''bathing.'' They stated that the definition of this term begins with a reference to ''oneself,'' but concludes with the phrase ''or drawing the water for a sponge bath and getting the equipment to the person or the person to the equipment.'' It is IRRC's understanding that the Department did not intend for the definition to encompass the services of a second person. Therefore, the definition should be revised to clarify this point. Further, IRRC requested the Department to provide an explanation for the deviation from the NAIC Model language.
This phrase is not included in the definition of ''bathing'' in the NAIC Model. Furthermore, the references to transporting equipment or the person imply that a second person is involved in the bathing process.
The Department agrees with all comments and has changed the definition to mirror the NAIC Model language.
Definition of ''cognitive impairment''
The IBC expressed concerns about the definition of ''cognitive impairment'' and that the regulations define cognitive impairment without the ability of an insurer to qualify the level of impairment for purposes of benefit eligibility. Although the IBC recognizes that the proposed definition is the medical standard, the IBC believed that the term ''deficiency,'' which is defined in the dictionary as ''inadequacy,'' is not a sufficiently significant standard to trigger benefits for the type of cognitive impairment covered by long-term care insurance policies. Further, it appears that the draft regulations can be interpreted to prohibit an insurer from establishing an appropriate standard to determine the level of cognitive impairment subject to long-term care insurance benefits. While the IBC did not object to a definition requiring only one type of deficiency before a person would be determined cognitively impaired, it seems that the language of the draft regulations could allow benefits to be triggered for minimum cognitive impairment when a person is still capable of functioning independently. The IBC believed that the draft definition ultimately could lead to an inordinate number of claims for minimal cognitive impairment, and this could adversely affect premium rates for future policyholders.
In the alternative, the IBC suggested that the Department adopt a definition that allows the policyholder with moderate to severe cognitive impairment to appropriately claim benefits as well as the insurer to develop rates for long-term care insurance that are affordable by the consumer. In this regard, the IBC suggested the following definition:
''Cognitive impairment'' means a [significant deficiency/deterioration] in a person's short-term or long-term memory, recognition as to person, place and time, deductive or abstract reasoning, or judgment [as it relates to safety awareness/that requires continual supervision to protect the individual covered under the policy].
An alternative would be to retain the draft definition but include in the regulations an express provision that allows insurers to determine at least a moderate level of cognitive impairment for a policyholder to claim benefits.
The Department does not agree and is retaining the definition as contained in the NAIC Model. Cognitive impairment should be determined by standardized testing therefore the change was not warranted.
Definition of ''long-term care insurance''
The AGENTS stated that a restatement of section 1103 of the act (40 P. S. § 991.1103) would be useful in the regulations to show that it includes qualified and non-qualified products, which are then defined separately in the definition.
The Department does not believe that a reiteration of the statute would add any substantive clarification. Therefore no change has been made.
Definition of ''mental or nervous disorder''
The AGENTS stated that the definition should be checked to see if it is compliant with the Healthcare Insurance Portability and Accountability Act (Pub. L. No. 104-191, 110 Stat. 1836) (HIPAA) and the act of December 21, 1998 (P. L. 1108, No. 150) (Act 150) regarding conditions covered under mental health parity. If there is a group long-term care policy with over 50 lives, the definition may need to be compatible. In addition to the text of covered conditions, there should be proper legislative citation.
The Department disagrees as the HIPAA and Act 150 specifically exempt the long-term care policies from this requirement.
Definition of ''home health care service''
The AGENTS raised the issue of whether this regulation complies with the act of December 20, 2000 (P. L. 967, No. 132) (Act 132) as it relates to home health care services.
The Department believes that the intent of section 4 of Act 132 (40 P. S. § 991.1103) was to include home health care service contracts under the definition of insurance rather than to define the actual services to be provided by home health care services. Any entity selling home health care service contracts that meets the revised definition in the Long-Term Care Act would be subject to these regulations. Therefore, no change was made.
Definition of ''Medicare''
The IFP stated that in referring to the Federal legislation which constitutes this program, this definition omits the NAIC phrase ''and any later amendments or substitutes thereof.'' Since the purpose of defining this term is presumably to treat benefits under that program as a whole, adding this phrase will prevent any inadvertent gaps from being created by changes in the Medicare program over time. They suggested the quoted phrase to contemplate future changes.
IRRC stated that this definition is similar to the corresponding definition in the NAIC Model. However, the NAIC Model definition of ''Medicare'' references ''any later amendments or substitutes thereof.'' The Department should revise the definition to include the NAIC language. Otherwise, the definition will not encompass future amendments to the Medicare statutes.
The Department agrees and has made the requested changes.
§ 89a.104(b)
The IFP stated that identifying providers of services may depend on their appropriate licensure or certification, the Department has added the phrase ''when the licensure or certification of the provider is required by the Commonwealth.'' The phrase, which varies from the NAIC Model, causes a problem by implying that appropriate licensure may not be required if another state does not have that requirement.
Since licensure or certification usually includes oversight, long-term care insurers would be hesitant to cover and somewhat lost to underwrite care provided at facilities not subject to that oversight. The IFP proposes that this phrase be deleted.
IRRC had concerns with subsection (b) which addresses the definitions of various service providers. The last sentence states, ''The definition may require that the provider be appropriately licensed or certified when the licensure or certification of the provider is required by the Commonwealth.'' IRRC believed that this sentence was confusing and that the intent of this provision should be clarified in the final-form regulations.
The Department is concerned that long-term care insurers could require providers of services who are not subject to Commonwealth licensure or certification to be licensed or certified in order to cover their services. The section has been modified to clarify that an insurer can require licensure or certification ''only'' if the ''state in which the provider is located'' requires licensure or certification of that provider.
Section 89a.105. Policy practices and provisions.
Definition of ''level premium''
The IBC believed the proposed definition of ''level premium'' should be clarified by the addition of the phrase ''for an individual person'' after the phrase ''change the premium.'' Otherwise, the absence of the term ''level premium'' may incorrectly lead the consumer to believe that the policy premium can change due to individual circumstances, such as attained age, health status, etc.
The Department is following the NAIC Model language and believes that the intent of this strict language is to not permit the use of the term ''level premium'' in any circumstance where the insurer has the ability to change the premium. The NAIC Model language was retained and no change was made.
Mental or nervous disorders
The IFP stated that § 89a.105(b)(1)(ii) prohibits the exclusion or limitation of benefits based on someone having ''Alzheimer's Disease or other related degenerative or dementing illnesses.'' In that these diseases are not clearly defined, the IFP suggested that the Department use the language within the § 89a.126(e)(12) (relating to standard format outline of coverage) prohibiting exclusion for ''insureds clinically diagnosed as having Alzheimer's disease or related degenerative and dementing illnesses.''
The IFP believed that while this would not operate as a complete definition, it would guarantee a clinical diagnosis of Alzheimer's or a related condition.
IRRC commented that the reference to ''other related degenerative or dementing illnesses'' in § 89a.105(b)(1)(ii) is vague and is not in the NAIC Model. IRRC further suggested that these terms should be clarified or deleted.
The Department agrees with the comments and has made the clarifying change as suggested by the IFP and IRRC. The Department added the additional language to be consistent with the language contained in the standard format Outline of Coverage in § 89a.126(e)(12). The standard format Outline of Coverage is consistent with the current regulation in § 89.919(5)(10) (relating to standard format for outline of coverage).
Premium rate increase
The AGENTS noted that in § 89a.105(f)(2), a reduction in benefits is not considered a premium change, and questioned whether the insurer should issue a retro credit or premium rollback to the initial annual premium date or whether the initial premium rate remains with reduced benefits.
The Department would like to clarify that § 89a.105(f)(2) and (3) are specifically related to the nonforfeiture benefit requirement in § 89a.123 (relating to nonforfeiture of benefit requirement). These two paragraphs define how initial premium levels are determined when changes in coverage levels have occurred that may trigger the nonforfeiture benefit. These paragraphs do not require insurers to issue retro credits or premium rollbacks. Therefore, the Department does not believe any further clarification or changes are necessary.
Privileged Information
IRRC mentioned that § 89a.105(g)(1)(iii) requires that telephonic or electronic enrollment include safeguards that assure the confidentiality of ''individually identifiable information.'' This provision in the NAIC Model includes the terms ''individually identifiable information'' and ''privileged information.'' The NAIC Model also references a definition of ''privileged information.'' The Department should explain why the term ''privileged information'' is not in this provision in the proposed rulemaking.
The Department did not incorporate this language because the NAIC Model references a definition that has not been adopted in the Commonwealth in either statute or regulation. Furthermore, privacy concerns have been addressed by Chapter 146a (relating to privacy of consumer financial information). In addition, the health information will be covered with the promulgation of Chapter 146b (relating to privacy of consumer health information). Thus, broad privacy protection will be accomplished by means of two different regulations.
Section 89a.106. Unintentional lapse.
The AGENTS stated that in § 89a.106(a)(3) the following should be inserted ''The 30-day notice by the insurer to the insured of a lapse for nonpayment of premium should be preceded by a notice from the insurer to the insurance producer.'' The AGENTS believed that the goal is to keep people covered. A producer can follow up to see if the premium notice was overlooked or that the insured's medical condition changed so that the bill was not paid. The AGENTS felt it is good public policy to prevent unintentional lapses in coverage. Requiring notification to the individual producer as soon as the termination date occurs puts the person who has the greatest interest in policy retention into the front line of clarifying the cause for the unintentional lapse. Producer notification as soon as the due date passes gives the consumer a chance to preserve coverage.
The Department wants to clarify that this regulation allows the insured to designate one additional person to be notified upon the lapse or termination of the policy. The insured has the choice of that designation. The Department can appreciate the AGENTS concerns and therefore have no objection to having an insured name the producer as an alternate to receive notices, if that is what the insured desires. However, it would be unduly burdensome on insurers to mandate that they also send the producer a notice of lapse or termination. Furthermore, this would be a significant deviation from the NAIC Model. Nothing in the regulation prohibits an insurer from notifying the producer of a lapse or termination in addition to the insured and their designee.
Section 89a.108. Required disclosure of rating practices to consumers.
In general, the IBC agreed with the intent of the draft regulations to protect the consumer by establishing new regulatory standards on disclosure and development of premium rates. The IBC believed that certain insurers in the long-term care marketplace have engaged in predatory pricing practices from time to time to the detriment of the consumer. Predatory pricing can result in large rate increases often unaffordable for individual policyholders, who potentially would be left without coverage. This practice damages the industry's reputation as well. Long-term care insurance is a relatively immature product without a large experience base or standard policies. Therefore, a significant amount of actuarial judgment is involved in developing rates. Furthermore, unlike health insurance, claims experience can take a long time to develop as well as be subject to short-term fluctuations. The practice of a 10-year ''look back'' period covers a period in which there were significant changes in the long-term care insurance marketplace. The IBC was concerned that a long period could result in irrelevant or potentially misleading information being presented to the consumer. Therefore, the IBC recommends a shorter ''look back'' period, such as 5 years.
The AGENTS stated that § 89a.108(b)(5) requiring 10 years' rate experience seemed like consumerism but it may be hard to achieve. Products change. The long-term care policies have evolved considerably over the past few years. Specific coverage being offered now may not have existed 10 years ago, as with qualified long-term care policies which did not come into existence until the HIPAA in 1996. The AGENTS recommended that subsection (b)(5) be deleted.
The AGENTS also stated that § 89a.108(c) requiring consumer signature attesting to the fact that he has read the cost of the product's evolution over 10 years may be meaningless because, as mentioned previously, the product is not the same. Besides, the consumer is more interested in what is being obtained now. That is a little like saying that a small group two-person health product costing $722 per month now only cost $200 10 years ago is relevant. It's not relevant to today's sale because the world has changed with new mandates, greater utilization, more uncompensated care and the resulting cost shifting to those with insurance, and the like.
The AGENTS stated that § 89a.108(e) requiring notice of a premium rate schedule increase to consumers 45 days prior to implementation date is prudent. They also wanted ''Advance notice to producers should also be sent out by the insurer'' added to this section. This helps the consumer in two ways: First, the producer can explain the basis for the change and preserve the account; or, second, if the rate increase is too steep, the producer will have some time to shop around to other insurers on the consumer's behalf.
IRRC believed that in § 89a.108(b)(5), insurers are required to provide premium rate increase information for a policy form or similar forms for the past 10 years. They stated that comparable policies, in many cases, did not exist 10 years ago and wanted the Department to amend the regulation to provide for flexibility when 10 years of data is not available.
The Department wants to note that the 10-year history requirement is NAIC Model language. It was developed with insurance industry input. The Department agrees that not all policies (or similar policies) existed 10 years ago; therefore the information is not available. As a result, the Department is inserting the following language ''. . . over the past 10 years or during the existence of the policy or similar policy up to a maximum of 10 years for this state . . .'' (new language italicized). This new language should allow flexibility when the 10-year history is not available, while still remaining consistent with the intent of the NAIC Model.
With respect to § 89a.108(c), the Department believes this requirement is an important consumer protection provision to ensure that consumers are provided with the consumer disclosure information required by the regulation. This section is consistent with the NAIC Model and no changes have been made to it.
With respect to § 89a.108(e), the Department believes that this proposed requirement would also be burdensome to insurers and is not consistent with the NAIC Model. Nothing in the regulation would prohibit the insurer from providing this type of notification to producers.
Section 89a.109. Initial filing requirements.
IBC stated that § 89a.109(b)(2)(iv)(B) provides that an actuary must certify that he has taken into account moderately adverse experience, i.e., a contingency margin, and that the carrier is pricing with the expectation of no future rate increase. Overall, IBC believed that this provision is a positive addition to the regulatory scheme as it will protect the consumer from certain predatory pricing practices. However, the IBC believed that there is also a negative aspect to this requirement in cases when an actuary has followed the regulatory guidelines, including margin and pricing so that there is no anticipated rate increase, but the carrier still is forced to file a rate increase.
The Department wants to note that this requirement is consistent with the NAIC Model. The Department believes this requirement is important for providing rate stability and predictability, one of the main goals of these revised regulations. No changes have been made.
IRRC noted that § 89a.109 of the proposed rulemaking does not mention a specific time period, but does reference the Accident and Health Filing Reform Act (40 P. S. §§ 3801--3815). To be more specific, the regulation should reference the time periods in sections 3 and 4 of the Accident and Health Filing Reform Act (40 P. S. §§ 3803 and 3804). IRRC also noted that in the NAIC Model, the insurer is given 30 days to provide the required information to the Commissioner.
The Department has added the specific citations to the regulation. However, the Department does not believe it is necessary to add specific time periods. If the statute changes the time-frames allowed, this reference to the sections will be more appropriate than actually giving the number of days.
Sections 89a.111. Minimum standards.
The IFP believed that in § 89a.111(4), (6) and (7) removing ''requiring'' from the beginning of the phrase will follow the style of the other subsections which begin with ''that.''
The Department agrees that this style would be more appropriate and has made the change accordingly.
Section 89a.112. Inflation protection.
The AGENTS supported presenting the option of inflation protection to consumers. Unfortunately, the NAIC Model assumes a choice for inflation protection that may or may not be there unless the consumer specifically opts-out by rejecting this coverage. The NAIC and the Department clearly want to protect consumers from future expenses due to cost of living increases. The way the regulation is currently worded may result in higher-priced coverage than the consumer wanted in the event that the producer did not obtain the signature. This would lead to more consumer complaints to the Department and policy cancellations because they may feel that coverage was forced upon them even if the producer's error was unintentional. A simpler way is to require the signature form as part of the application.
The AGENTS recommend the following language as a substitute for subsection (g).
'(g) Inflation protection in a long-term care insurance policy shall be offered by the producer and documented by a form signed by the consumer that attests to the fact that inflation protection was offered and accepted or rejected. The form may be included within the application or on a separate form as the insurer chooses. An insurer shall not accept an application from a producer without this signed form.'MThe text of this signed statement shall read, ''I have reviewed the outline of coverage and graphs that compare the benefits and premiums of this policy with and without inflation protection. Specifically, I have reviewed policies(s) ______________ , and I accept ___ reject ___ (check one) inflation protection.''The IFP believed that in describing in § 89a.112(g), the process by which an applicant may accept or reject inflation protection, the Department prescribes the language by which a rejection should be made. The language currently states that the applicant has ''reviewed policy(ies), and . . . '' rejects the inflation protection.
The IFP suggested that it would be more accurate in terms of what actually takes place in such a process to have that last sentence state, ''Specifically, I have reviewed Plans ___________ , and I reject inflation protection.''
The Department believes it is important to maintain the consumer protections by means of the mandatory offer of inflation protection in § 89a.112(g). This type and manner of offer is consistent with NAIC Model and is therefore not being revised. The Department is making the minor editorial change as suggested by the IFP. This change makes the section consistent with the NAIC Model.
Section 89a.113. Requirements for application forms and replacement coverage.
The IFP brought to the Department's attention that while it is legally more accurate, the substitution of ''Commonwealth'' for ''state'' in various standardized forms which must be delivered requires carriers to dispense with current materials, file forms for approval and print materials specific to Pennsylvania. It would save insurers money if this change were deleted from the proposal at least with respect to specified forms which must be delivered and the use of which insurers may already have adopted across their operations.
The IFP pointed out, for example, that in § 89a.113(c) that item 4 of the Statement to Applicant By Agent starts: ''2. Commonwealth law provides . . . .'' This is a variation from the NAIC Model, which, while meaningless in terms of substance, is a cost item which is more than negligible.
IRRC looked at the sample application forms that are to be used by insurance companies and noted that the Department had changed NAIC Model language from ''state'' to ''Commonwealth'' in the proposed rulemaking. Commentators have suggested that by substituting ''Commonwealth'' for ''state'' in various standardized forms, carriers would be required to print costly materials specific only to Pennsylvania. IRRC wondered if there is a need for insurers to make application forms that are specific to Pennsylvania?
The Department realized that there could be additional and unnecessary costs associated with the changes as proposed and therefore has changed the term ''Commonwealth'' back to ''state'' in applications and other standard forms that do not have to be Pennsylvania specific.
Section 89a.114. Reporting requirements.
The AGENTS stated that § 89a.114(b) requiring insurers to report to the Department the top 10% of its producers with the greatest percentages of lapses and replacements appears to be adding to the Department workload without producing discernable benefit. For one thing, the Department's enforcement resources do not extend to launching an investigation of the top 10% unless there is a specific suspected pattern of abuse. If the intent is to have ready access to the data through a Market Conduct Examination, another approach would be to have insurers collect this data and have it readily available if the Department needs it. The other thing missing from this section is the understanding that all replacements are not the same. The Department is looking for abuses occurring when the original policy did not need to be replaced. It should not lump these abuses in with legitimate replacements occurring because of a policy enhancement.
Alternative wording should be:
(b) 'Insurers shall provide this data to the department in the event of a market conduct or enforcement investigation. For purposes of this section, the term replacement shall not include long-term care product improvements or enhancements of coverage as an endorsement to or in the context of an existing policy.'The AGENTS stated that in § 89a.114(c) they agree with the statement in the regulation that reported replacement and lapse rates do not constitute a violation of insurance law. The AGENTS recommend that the word ''alone'' be deleted in this sentence. Including it leaves the implication that reported lapse and replacement rates might be a violation of insurance laws or necessarily imply wrongdoing. There may be legitimate reasons why policies lapse, for example if a company does not renew a group plan or if an area is hit by layoffs or by the economic downturn.
The sentence ''The reports are for the purpose of reviewing more closely agent activities regarding the sale of long-term care insurance'' should be deleted for the reason stated. If the Department requires the information for purposes of a market conduct exam or enforcement investigation, it is available on a case by case basis from the insurer.
The AGENTS stated that § 89a.114(f) requires reporting of qualified the long-term care contracts. They wondered ''Why did the Department ask for this information re qualified and not unqualified policies as well?''
The Department believes that the information required in the reports in § 89a.114(b) are important monitoring and enforcement tools and has not changed the language. The Department is adding a new standardized reporting form as Appendix G (relating to long-term care insurance replacement and lapse reporting form). This new form is being adopted in the NAIC Model.
The Department agrees with the AGENTS regarding § 89a.114(c) that replacement and lapse rates alone should not constitute a violation of insurance laws or necessarily imply wrongdoing. However, they have misinterpreted this section. It affirms that these replacement and lapse rates alone would not be used as the sole evidence of a violation. The Department has not revised the NAIC Model language.
The requirement in § 89a.114(f) is necessary for Federally tax-qualified long-term care policies to meet Federal IRS requirements. There are no similar requirements for nontax qualified long-term care policies. This is consistent with the NAIC Model and the Department has not made any changes to this section.
Section 89a.115. Licensing.
The AGENTS commented that too specific a reference to a section of the law that may be changed because of Model Producer Licensing Act enactment in the near future may force the Department to update this regulation shortly after it went into effect. Alternative wording might be:
'No one may sell, solicit or negotiate with respect to long-term care insurance unless licensed as a producer by the department.'The Department wants to note that the statutory citations contained in the regulation are current to date. The Department believes it is appropriate to cite to current law and not take into account pending legislative language. If legislation is enacted, the new requirements would supersede all previous licensing requirements. Thus, no change has been made.
Section 89a.118 Premium rate schedule increases.
The IFP stated that projected lapse and past lapse rates are required for rate increase filings meeting certain criteria under this section. Following the wording of the NAIC Model, it appears that the last word in the first criteria subsection (h)(1) should be ''form or forms'' rather than ''form.''
The IBC stated that the required disclosure of all prior rate increases for similar policy forms, especially given the broad definition of ''similar'' policy forms in § 89a.108(b)(5), could make selling policies difficult after a rate increase. Because the relevant loss ratio calculations for determining rate increases are on a present value basis, and because of the previously-referenced disincentives for rate increases, a company with adverse experience might choose to wait and see if experience improves rather than file for a rate increase. If claims experience does not improve, however, the insurer could sustain a large financial loss that could result in a large premium increase later for the consumer.
The IBC stated that § 89a.118 allows for an 85% loss ratio on the premium increase and a 58% loss ratio on the initial premium in pricing a revised premium. Thus the loss ratio on the block of business over its lifetime is a weighted average (by premium dollars) of 58% and 85%. Under some circumstances, depending on claim and administrative expenses, an insurer ultimately could show a financial loss on the business. Too frequent and significant financial losses could result in the withdrawal of carriers from the marketplace.
The Department agrees with the minor editorial change the IFP suggested and has modified the section to add ''or forms'' which follows the NAIC Model.
The Department believes that the required loss ratios in § 89a.118 are appropriate. The loss ratios were developed by the NAIC with input from the insurance industry. Thus, the Department has not changed this section.
Section 89a.119, 89.123 and 89.124. Filing requirement; nonforfeiture benefit requirement; and standards for benefit triggers.
The IFP noted that one of its members called attention to the fact that statutory references in the proposed regulation in the captioned sections differ from citations in the current regulation. The IFP suspected that this is not surprising in light of intervening changes, but suggested that they be reviewed for accuracy.
The Department has reviewed the statutory references and modified § 89a.119 as appropriate. The other referenced sections did not require any changes.
Section 89a.120. Standards for marketing.
The AGENTS stated in § 89a.120(c)(1) that association group marketing of long-term care insurance is a growing component of the market. Associations promoting the long-term care insurance policies do not sell insurance unless they are licensed to do so. Associations may endorse a product under an arrangement with bona fide producers. The word 'selling' should be deleted. The AGENTS suggested the addition of a sentence to read:
''Nothing in this section shall be construed as permitting the marketing, soliciting, selling, or negotiating of an association-sponsored long-term care insurance policy unless there is compliance with producer licensing laws of the Commonwealth.''The AGENTS stated in § 89a.120(c)(3) that the association is required in this section to reveal commissions received. Again, the point must be made that associations must be licensed before it can legally receive commissions. The other issue is the disclosure of the commission itself. Certainly, the association's Board and other decision-makers would have that information when the decision was made. Disclosing commissions received might encourage agent rebating. Members might exert pressure to ''give back'' some of the commission, something at odds with Act 205 and long-standing Department policy. This regulation should not place producers in a position to fend off association demands for a rebate. Insurance producers are not required to disclose commission income now for any type of insurance. This should not be the place to start.
The AGENTS stated in § 89a.120(c)(5) that the board of directors of an association should be required to approve of the sponsored plan and terms of compensation arrangements with the insurer. Add the words ''or producer'' since the association considers a sponsored policy through a licensed producer and not necessarily directly to the insurer. Again, the word 'selling' should be deleted as inconsistent with licensing law.
The AGENTS stated in § 89a.120(c)(6) that this section has an exemption for qualified long-term care insurance. The AGENTS requested clarification. Does this pose an added regulatory hurdle for nonqualified plans? This section also mandates that an association ''engage the services of a person with expertise in long-term care insurance'' to examine the proposed policy, and the like. The AGENTS question this requirement. Should the association always contract with a person having expertise in long-term care insurance before deciding? It may not always be in its best interest if the expert is, in fact, partial towards a competitor. An expert may recommend that the association not pursue a long-term care policy because the consumer may just happen to have a disability income policy that the consumer wants to place. This requirement will enhance predatory behavior in the marketplace. It may also add to the association's total cost of providing long-term care insurance because of the consultant's cost. In addition, if the association has a comfort level with an existing producer or product, why create another hoop to jump through? We understand where we think the Department is going on this provision but maintain that it will impede the growth of long-term care insurance. There is no harm in getting a second opinion but a better approach would delete existing paragraph (6)(i) and use the following substitute language:
''Nothing shall prevent an association from engaging the services of a person with expertise in the long-term care insurance not affiliated with the insurer to conduct an examination of the policies . . .''The Department has, after further examination and research, considered the comments made here and has retained language relating to associations from the NAIC Model. The AGENTS stated correctly that associations may only sell, solicit or negotiate insurance when licensed to do so. In such a case, compliance with licensing statutes and all other applicable statutes and regulations would apply accordingly. Further, the Department has added the phrase ''or producer'' in § 89a.120(c)(5) as suggested by the AGENTS.
Section 89a.123. Nonforfeiture benefit requirement.
Overall the IBC believed this provision is favorable because it prevents carriers from engaging in inappropriately low pricing. In certain instances, predatory pricing carriers would benefit from having received premiums, which later are raised significantly for policies that subsequently lapse after a rate increase. The reason this practice is favorable to the companies is that long-term care insurance is considered a ''lapse supported product.'' In considering profit or loss for a lapse supported product, an actuary takes into account those policies that lapse after covering issue and maintenance expenses but before claims are incurred.
Under the draft regulations, the policyholder had two choices. The policyholder can obtain either a reduced benefit, under certain circumstances, at the original premium or a reduced paid-up benefit with no further premium payments required in the event of a rate increase. The IBC believed that the addition of these options is a good alternative to the lapse of a policy after a consumer would have paid premiums for a number of years without receiving benefits.
The IBC was concerned, however, that in the event of a rate increase this provision, which potentially provides a nonforfeiture benefit depending on issue age and level of premium increase, imposed another additional cost to the insurer because long-term care insurance is a lapse supported product. The proposed rulemaking did mitigate this cost somewhat by the Department's allowing the insurer (if the Department is convinced that a rising rate spiral exists) to replace existing coverage, without underwriting, with a comparable product being sold. This is essentially a pooling mechanism that allows individuals holding a troubled policy to switch to a more stable policy without underwriting. While this provision is preferable to merely letting the troubled policy spiral out of control, there are still restrictions on rate increases for the resulting combined block of policies that could prevent a carrier from effectively pricing its products to remain in the marketplace.
The Department believes these requirements are appropriate and were developed by the NAIC with input from the insurance industry. No changes have been made to this section.
Section 89a.124. Standards for benefit triggers.
The AGENTS stated in § 89a.124(b) that this section lists activities of daily living as 'triggers' for long-term care insurance. Although the Department uses the word ''may,'' there appears to be an inference that all must be triggered versus a number of these activities depending on the specific policy and whether or not it is qualified or nonqualified. Although not explicitly stated, the regulation appears to be addressing nonqualified plans since § 89a.125 (relating to additional standards for benefit triggers for qualified long-term care insurance contracts) cites additional standards for qualified long-term care triggers.
The AGENTS further stated that in light of Act 13, home health care plans that are regulated as long-term care insurance may not have the same set of triggers. Consider substitute language:
'(b) Insurers must conspicuously list the activities of daily living necessary to trigger benefits.'The Department considered the use of ''may'' in § 89a.124(b). It should be noted that § 89a.124(a) requires: ''Eligibility for the payment of benefits may not be more restrictive than requiring either a deficiency in the ability to perform not more three activities of daily living or the presence of cognitive impairment.'' As stated earlier regarding home health polices in § 89a.104, the home health care insurance licensing requirements added by Act 132 did not address nor change the services provided under home health care insurance that would include benefit triggers. Furthermore, these requirements are consistent with the NAIC Model. The Department believes these requirements are clear and no changes have been made.
Section 89a.125. Additional standards for benefit triggers for qualified long-term care insurance contracts.
The Department has modified this section to put the defined terms in alphabetical order.
Section 89a.126. Standard format for coverage.
The AGENTS stated in § 89a.126(e)(15) that this part of the format directs the policyholder to contact the Department of Aging's Senior Health Insurance Assistance Program (SHIP) (APPRISE (800) 783-7067) for general questions regarding the long-term care insurance and to the insurer for specific questions about the policy.
From the point of view of the three agents' associations commenting on this regulation, the first point of contact should be the producer who sold the policy. The consumer has the professional credentials to discuss the long-term care insurance. The consumer also has the professional basis to want a good customer relationship to continue. The incentive is to answer both general and specific questions. The AGENTS strongly believe that the producer is the first recourse. Contacting the Senior Health Insurance Assistance Program or the insurer, or both, should be fallback options after the producer has tried to help resolve the question. The regulation's language ignores the vital function of the insurance producer.
The AGENTS suggested substitute language should be: ''For questions of either a general or specific nature regarding long-term care insurance, contact the licensed insurance producer who sold you the policy. Other resources are the State Senior Health Insurance Assistance Program for questions generally relating to long-term care insurance or the insurer (insert insurance company name and phone number) for questions specific to a particular long-term care policy.''
The Department generally agrees that the producer is an integral part of the communication process with insurance consumers, however it appears unnecessary to list them in this section. The Department, in consistency with IRRC comments on § 89a.113 regarding Nationally consistent forms, has revised this language to be consistent with the NAIC Model by removing the specific reference to the APPRISE Program and using the generic reference to the ''State Health Insurance Assistance Program listed in the brochure.'' The Department believes that APPRISE, which is part of the SHIP program, is the best source for impartial information and counseling on long-term care insurance and the SHIP should be identified as the primary contact for general long-term care insurance questions.
Section 89a.129. Permitted compensation arrangements.
The AGENTS stated in § 89a.129(a) and (b) that the sections listing permitted compensation should spell out exactly the legislative citation regarding new policies (50 %) and renewals (up to 10%) as well as the prohibition on receiving higher commissions on replacements.
Regarding § 89a.129(c), the AGENTS commented that they strongly disagree with the definition to include nonmonetary incentives such as trips. Given that a producer's bonus may include more than one type of insurance, it creates bookkeeping difficulty. If a producer sells several types of health insurance, incentives such as trips are usually bundled rather than being segmented by specific line. In addition, a bonus may have the real world impact of reducing producer financial compensation if there is an overall cap including nonmonetary gain. This amounts to an intrusion into the ways producers are compensated, a stretch from the traditional regulatory reach of the Department. Traditionally, the Department in areas such as Act 143 on the P/C side (agency termination law) has shied away from getting into the middle of agency-company commission issues.
The IFP very much appreciated the Department's willingness to take another look at the advisability of retaining the current regulation's restrictions on sales compensation. The IFP realized that the Department may have received some correspondence from insurers separate from the IFP's on this issue. Moreover, as the IFP discussed, this is noted as an optional piece in the NAIC Model. Frankly, member companies of the IFP have been living with the regulation for some time, so deleting this takes second seat to getting the overall regulation in place.
The IFP stated that there is little use in reiterating arguments for deleting this section which have been well articulated by companies which are experts in selling the product. However, the success of the effort to delete this section probably depends on the Department's view of what has happened in the marketplace and what protections are required.
The IFP also stated that the new regulation unarguably contains many standards intended to address the problem of inappropriate replacements. Further, the Department is aware that the proper sale of this product is contact intensive, so that, unless inappropriate sales behavior is a major problem, allowing ample selling inducements is essential to having both knowledgeable agents and sound sales practices. Consequently, unless there is widespread inappropriate replacement activity which these older restrictions really help discourage, the IFP believes the case for dropping this section is compelling.
IRRC questioned the retention of this section with the existing provisions, which place limits on compensation to an agent or broker for the sale of a long-term care insurance policy (see § 89.921 (relating to permitted compensation arrangements)). For example, the rule limits a commission or other compensation to a maximum of 50% of the first year premium of a long-term care policy. However, the NAIC Model uses a maximum of 200%. Commentators question the need for the 50% limitation. IRRC wanted to know what is the Department's rationale for maintaining the 50% rule?
The Department noted that section 1112 of the Long-Term Care Act (40 P. S. § 991.1112) requires that: ''The department shall promulgate reasonable regulations to establish minimum standards for marketing practices, agent compensation arrangements, agent testing, penalties and reporting practices for long-term care insurance.'' The Department established the permitted compensation arrangements in 1995 by means of an approved and promulgated regulation to address concerns about marketing and sales practices including churning of policies, which sometimes included physical intimidation of senior citizens. The number of churning cases has decreased since the Department originally promulgated this regulation. However, the Department is concerned that revising these requirements would cause an increase in abusive sales and marketing practices, including churning.
Regarding the NAIC Model language on permitted compensation arrangements, the NAIC Model states: ''An insurer or other entity may provide commission or other compensation to an agent or other representative for the sale of a long-term care insurance policy or certificate only if the first year commission or other first year compensation is no more than 200 percent of the commission or other compensation paid for selling or servicing the policy or certificate in the second year or period.'' The 200% commission in the NAIC Model is based upon the maximum allowable second year commission for the policy, not based upon the policy premiums, while Pennsylvania's permitted compensation arrangements are based on policy premiums. Therefore, the Department's current regulatory language allows for a higher initial year commission. The Department believes the permitted compensation arrangements are reasonable and has not changed this section.
Appendix B--Long-Term Care Personal Worksheet
The IFP noted that the Long-Term Care Personal Worksheet which is Appendix B follows the NAIC Model except for the addition on the second page under the question about buying inflation protection referring applicants to the Agency on Aging. That information is already provided in the Shopper's Guide and its repetition here would require a separate Pennsylvania form. As the IFP indicated, this is an additional cost to insurers which it appears unnecessary to incur in light of the redundancy.
The Department agrees and, in consistency with the IRRC comments on § 89a.113 regarding Nationally consistent forms, has modified the language to be consistent with the NAIC Model.
The NAIC, at its winter meeting in Chicago (December 2001), proposed that Appendix G be added to the NAIC Model regulation. As this was after the proposed regulation's public comment period, commentators did not have the opportunity to comment on this addition. However, this change was signed off by the industry and does not add any substantive changes to the NAIC Model regulation. In fact, it makes it easier for insurers to use the same format, therefore, the Department has added Appendix G with the appropriate references in § 89a.114.
Affected Parties
This final-form rulemaking applies to insurance companies doing the business of long-term care insurance in this Commonwealth.
Fiscal Impact
State Government
There will be no increase in cost to the Department due to the adoption of Chapter 89a.
General Public
There will be no fiscal impact to the public.
Political Subdivisions
The final-form rulemaking will not impose additional costs on political subdivisions.
Private Sector
This final-form rulemaking will not impose additional costs on insurance companies doing the business of long-term care insurance in this Commonwealth.
Paperwork
The adoption of the rulemaking will not impose additional paperwork on the Department or the insurance industry.
Effectiveness/Sunset Date
This final-form rulemaking becomes effective upon publication in the Pennsylvania Bulletin. No sunset date has been assigned.
Contact person
Questions regarding this final-form rulemaking, should be directed to Peter J. Salvatore, Regulatory Coordinator, Office of Special Projects, 1326 Strawberry Square, Harrisburg, PA 17120, (717) 787-4429. In addition, questions may be e-mailed to psalvatore@state.pa.us or faxed to (717) 772-1969.
Regulatory review
Under section 5(a) of the Regulatory Review Act, on January 23, 2002 (71 P. S. § 745.5(a)), the Department submitted a copy of this final-form rulemaking to IRRC and to the Chairpersons of the House Insurance Committee and the Senate Banking and Insurance Committee. In addition to the submitted final-form rulemaking, the Department has provided IRRC and the Committees with a copy of a detailed Regulatory Analysis Form prepared by the Department in compliance with Executive Order 1996-1, ''Regulatory Review and Promulgation.'' A copy of that material is available to the public upon request.
In preparing this final-form rulemaking, the Department considered all comments received from IRRC, the Committees and the public. This final-form rulemaking was deemed approved by the House and Senate Committees on February 12, 2002. In accordance with section 5.1(d) of the Regulatory Review Act (71 P. S. § 745.5a(d)), IRRC met on February 21, 2002, and approved the final-form rulemaking in accordance with section 5.1(e), of the Regulatory Review Act.
Findings
The Department finds that:
(1) Public notice of intention to adopt this rulemaking as amended by this order has been given under sections 201 and 202 of the act of July 31, 1968 (P. L. 769, No. 240) (45 P. S. §§ 1201 and 1202) and the regulations thereunder, 1 Pa. Code §§ 7.1 and 7.2.
(2) The adoption of this rulemaking in the manner provided in this order is necessary and appropriate for the administration and enforcement of the authorizing statutes.
Order
The Department, acting under the authorizing statutes, orders that:
(a) The regulations of the Department, 31 Pa. Code, are amended by deleting §§ 89.901--89.921 and by adding §§ 89a.1--89a.129 and Appendices A--G, to read as set forth in Annex A.
(2) The Department shall submit this order and Annex A to the Office of General Counsel and Office of Attorney General for approval as to form and legality as required by law.
(3) The Department shall certify this order and Annex A and deposit them with the Legislative Reference Bureau as required by law.
(4) This final-form rulemaking shall take effect upon final publication in the Pennsylvania Bulletin.
M. DIANE KOKEN,
Insurance Commissioner(Editor's Note: For the text of the order of the Independent Regulatory Review Commision, relating to this document, see 32 Pa.B. 1362 (March 9, 2002).)
Fiscal Note: Fiscal Note 11-208 remains valid for the final adoption of the subject regulations.
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