Docstoc

Seven Reason CalPERS

Document Sample
Seven Reason CalPERS Powered By Docstoc
					Seven Reason
 To Beware of
 CalPERS
                  Can CalPERS
           Long-Term Care Plan Survive?
Why was this white paper compiled?
While much attention is given the CalPERS pension and health system, very little media
coverage is directed to the member-funded long-term care insurance program. In an era where
great institutions stumble and fall, e.g. Lehman Brothers, Fannie Mae, Freddie Mac etc., active
due diligence should be practiced and tough questions must be asked.
This white paper will address seven dangers of CalPERS Long-Term Care program, including:



     #1 CalPERS Long-Term Care program is financially deteriorating and it
       is possible to lose your benefits and/or your money.

     #2 CalPERS LTC Operation is not financially linked to, or supported by,
        its Health or Pension Operations.

     #3 CalPERS LTC is not fully insured and has no financial reserves or
        surplus as required of regulated insurers.

     #4 CalPERS is not regulated by SB898 Rate Stabilization legislation
        which protects California consumers from unfair rate increases.

     #5 CalPERS rate volatility is not due to low premiums.

     #6 CalPERS is not backstopped by the State of California.

     #7 CalPERS LTC program is not endorsed by the State of California.




The contents of this paper are one interpretation. We strongly encourage you to do your own due
diligence and reach an independent opinion, then take appropriate action as you deem fit.

Most of the resources you need can be downloaded from http://www.calpers.ca.gov/
#1 CalPERS LTC program is financially deteriorating.
From 2004 to 2005, the CalPERS long-term care program’s financial position deteriorated from a modest
$1.3 Million surplus, to a projected deficit of $812 Million.
On 2/15/06, the CalPERS Health Benefits Committee met and was cautioned: “The only true risk of the
CalPERS Long-term Care Program is that at some time there would not be sufficient funding to pay
promised benefits. This can occur only if the Program’s actual experience deviates from the experience
assumed via the actuarial assumptions and the actual Program’s experience is adverse.”
Unfortunately, the program’s actual experience IS getting worse. According to CalPERS records, some
of the key variables accounting for the deterioration of the financial position from 2004 to 2005 were
some critical “revisions” i.e. a change in actuarial assumptions, underpinning the plan. In basic language,
actuaries began using actual claims experience and costs rather than industry-wide averages. The
valuation analysis also contained this warning:


                “These revisions collectively result in a significant increase in
                projected future claims for the Program as compared to 2004
                valuation. Please note that if experience continues to emerge in
                a manner consistent with how experience has emerged to date,
                valuation results will continue to deteriorate.”
                (CalPERS Health Benefits Committee February 15, 2006, Agenda Item 6)



And the situation is not likely to get better soon…
In a discussion of efforts to stabilize the program, a June 6, 2006 staff memo to the CalPERS Long-term
Care Advisory Committee observed some of the program’s disadvantages:


                “CalPERS does not have the ability to subsidize this Program
                with other business lines or financial reserves as does other long
                term care insurance carriers.”
                “The long term care marketplace has matured with many
                insurers leaving the market; the ones that remain, or are
                entering the market, are savvier and more financially
                stable.”
                “In recent years, new policy sales for this Program have been
                low but generally better than in the individual long term care
                marketplace. New policies have balanced departures with total
                policies-in-force remaining basically flat. Based upon this, the
                Program cannot look to expand to cover the projected
                deficit.”
                (Quotations from Staff Memo to the CalPERS Long-term Care Advisory Committee, dated
                6/6/2006. Bold emphasis added)



Taking into account the July 2007 rate hike of 33.6%, the most recent plan valuation study (2006),
continues to show a deficit, (-$147 Million) and no reserves. Yet, there may be another shoe to drop:
according to data from a recent CalPERS investment report, as of July 31, 2008, the Long-term Care
program had a substantial exposure to equities and real estate. Unknown at this time is the impact on plan
assets of the recent crisis in financial markets.

In summary, CalPERS’ own data suggests it is not financially strong and, in fact, is in the red, with no
financial reserves. Its source of revenue--policyholder premium payments-- is dependent on participants’
willingness to remain in the program and accept premium rate hikes.

[Reader’s Note: Recently, the State of California chose to endorse a new provider as the best
long-term care insurance for California employers. For information on the financial strength of
this new plan or how to introduce the program to your agency, contact LTC@derendinger.com ]


#2 CalPERS LTC Operation is not financially linked to, or supported by, its
Health or Pension Operations.
In 1995, CalPERS launched its Long-term Care Program. The CalPERS Board of Administration
determined from the onset that the program would be voluntary, not-for-profit, and self-funded. A
firewall, so to speak, sits between the LTC Operation and the Pension and Health Operations; the LTC
side cannot borrow or access funds earned by CalPERS other divisions. However, the CalPERS Health
Benefits Committee was apprised of the program’s major risk factors as early as February 2006:


                   “What are the risks of the Long-term Care Program? The only
                   true risk of the CalPERS Long-term Care Program is that at
                   some time there would not be sufficient funding to pay
                   promised benefits.”
                   [Source: CalPERS Long-Term Care Advisory Committee memo, dated June 6, 2006]




Actually, the fact that its long-term care program is self-insured may be one source of its issues. In fact, it
does not even have reinsurance. According to CalPERS, it:


                   “does not have the ability to subsidize this program with other
                   business lines or financial reserves.”
                   [Source: CalPERS Long-Term Care Advisory Committee memo, dated June 6, 2006]




It appears the CalPERS Long-term care program will stand or fail on its own merits, as it is not
subsidized by other CalPERS programs.


[Reader’s note: CalPERS also is not regulated by the California Department of Insurance.]
#3 CalPERS LTC is not fully insured and has no financial reserves or surplus
as required of regulated insurers.
Unlike other long-term care programs, CalPERS LTC is not a regulated insurer. Nor is it backed by an
insurance company or reinsurer. In fact, it has no reserves or surplus to fall back on. For example,
according to CalPERS’ own records from the December 18, 2007 CalPERS Health Benefits Committee
meeting, the 2007 valuation report reflects a $147.7 Million deficit financial position, and even this
figure is assuming some pretty favorable conditions e.g. the plan achieves investment earnings of 7.79%.
[Reader’s note: We suggest the reader download a copy of the CalPERS investment report for the period
August 1, 2007 to July 31, 2008 to see what investment earnings actually have been.]

#4 CalPERS is not regulated by SB898 Rate Stabilization legislation which
protects California consumers from unfair rate increases.
Sponsoring agencies and their employee policyholders have no protection or recourse against CalPERS
recent rate increases of 33.6% and 18%. Ironically, CalPERS is exempt from California Department of
Insurance legislation, designed to protect individual policyholders.


                  ARE LONG-TERM CARE INSURANCE RATES REGULATED?

Policies currently available in California from insurers regulated by the California Department
of Insurance are subject to the "rate stabilization" law. This means that premium rates are
subject to actuarial review by the Department and rate increases on these policies are subject to
additional review and justification requirements…
…Though the National Association of Insurance Commissioners (NAIC) has promulgated model
regulations for rate stability, no other state has enlarged on the NAIC rate provisions like
California. While the NAIC Model places certain restrictions on rate increases, the provisions of
SB 898 have extended these to include additional requirements and sanctions when insurers
exceed specific benchmark amounts. These and other requirements to certify the adequacy of
initial rate filings and requests for rate increases makes California unique and at the forefront of
consumer protection in rate stability. (Excerpts from the State of California Department of Insurance website:
http://www.insurance.ca.gov/:)




            Other Insurance California Consumer Protection Legislation
           Which Only Applies to Fully-Insured Long-Term Care Policies*:
SB 1943 (Mello) Effective January 1993                     SB 870 (Vasconcellos) 1999
SB 1052 (Vasconcellos), Chapter 699, Statutes of 1997      SB 475 (Dunn), Chapter 669, Statutes of 1999
AB 1483 (Gallegos), Chapter 700, Statutes 1997            SB 898 (Dunn), Chapter 812, Statutes 2000
SB 527 (Rosenthal), Chapter 701, Statutes of 1997           SB 455 Effective January 1, 2002
SB 1537 (Rosenthal) 1998                                   SB 1613 (Dunn), Chapter 675, Statutes of 2002
                    SB 1974 (Polanco) Insurance Policies, Chapter 358, Statutes of 2002
*CalPERS LTC policyholders are not protected by any of these or other consumer protection legislation
[Reader’s note: while CalPERS is unregulated and not subject to such consumer protection
laws, the State’s new “endorsed” program IS governed by SB898 and similar consumer
protection laws, thereby protecting policyholders.]



#5 CalPERS rate volatility is not due to low premiums.
CalPERS does not have the lowest priced LTC program in California. Yet other low-cost programs are
managing without having a volatile pricing history (see example below).

Monthly Premiums*             Comprehensive Coverage $200 Daily Benefit Amount
                                            With Inflation Protection With 5% Automatic
Age     Plan                                (Future Periodic)         Inflation Protection
45      City of San Jose $365,000 Plan      $37.06                    $128.22
45      CalPERS $438,000 Plan               $53.00                    $175.00
45      City of San Jose $730,000 Plan      $46.32                    $160.28
55      City of San Jose $365,000 Plan      $79.42                    $211.64
55      CalPERS $438,000 Plan               $86.00                    $272.00
55      City of San Jose $730,000 Plan      $99.26                    $264.54
*This is not intended to qualify as an insurance proposal or comparison.

According to public records, CalPERS has low rates, but not the lowest. Its program is facing headwinds
from other challenges, among them:


                   “In order for CalPERS to compete on a level field with
                   commercial carriers, it would require a segmentation of the
                   current risk pool through two-party discounts (spousal), prime,
                   average, and sub-average rates and other discounts and
                   incentives linked to more restrictive underwriting.”
                   [Comments from CalPERS Long-term Care Advisory Committee staff memo dated June
                   6, 2006.]




#6 CalPERS is not backstopped by the State of California.
CalPERS Long-Term Care program is a voluntary self-insured plan; it stands on its own, with its source
of revenue totally dependent on its participants’ willingness to remain in the program and make premium
payments. CalPERS is not regulated by the California Department of Insurance, nor is it covered under
the California Insurance Guarantee Association, so there is no protection for its policyholders, should it
be unable to fund claims now and into the future.



#7 CalPERS LTC program is not endorsed by the State of California.
In early 2003, the State of California released an Invitation To Participate (ITP), which was
developed to find a single contract with a single insurance company for the employer market.
The driving force behind this ITP was the State’s interest in increasing private long-term care
(LTC) insurance sales, thereby reducing the demand that will be placed on Medi-Cal at the time
babyboomers begin to need LTC. The State was also interested in reducing the loss of job
productivity due to employees leaving the work force, part- or full-time, to take care of their
family members.

The State believed they could offer the winning proposer some unique advantages, such as a
form of Medi-Cal asset protection, not available outside this program.

After several months, the winner was announced and on November 9, 2005, under the auspices
of the Department of Health Care Services (DHCS), a new statewide long-term care insurance
program offered through the workplace was launched. It is the only program of its kind,
endorsed by the California Partnership for Long-Term Care (CPLTC). “This new program gives
California employees access to CPLTC-certified policies through the workplace. CPLTC-
certified policies are designed to help protect the financial independence of Californians and
contain a special “lifetime asset protection” feature.”

[Reader’s Note: CalPERS did not win this bid. For more information about this new long-term
care insurance provider, now officially endorsed by the State of California, contact
LTC@derendinger.com].
In Summary:
There are additional misunderstandings about this program, which can be addressed elsewhere
e.g. that CalPERS coverage qualifies as “group insurance,” available with guarantee issue and no
health questions or that the original Pension Protection Act legislation includes the CalPERS
long-term care program for special police and fire tax incentives.
In the end, benefit plan administrators, fiduciaries and agencies passively making this
program available to members must ask the tough questions, especially given recent events
in the financial markets. Perhaps the toughest question of all is “what’s in a name?”

“Would you think of this program in a different light, if it
did not have the ‘CalPERS’ name?”

Given the current financial position of the program, its rate
increase history, and lack of independent rating agency
endorsement, “would you allow another vendor under these
circumstances anywhere near your employees and
members?”

To learn what other agencies are doing about the CalPERS
problem and more about the new State of California
endorsed long-term care program, contact


LTC@derendinger.com or phone 1(888) 358-7080


A. Francois Derendinger Insurance Agency, Inc.
San Jose California
License No. 0563986

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:99
posted:3/28/2010
language:English
pages:8