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Actuarial Guideline LI (AG 51)

Last Updated 10/21/2022

Issue: Actuarial Guideline LI—The Application of Asset Adequacy Testing to Long-Term Care Insurance Reserves (AG 51)—was adopted in 2017 to clarify requirements for the calculation of long-term care insurance (LTCI) reserves. Ongoing losses, typically driven by adverse reserve development and possible solvency impairments to blocks of LTCI policies have been concerning state insurance regulators. AG 51 was a regulatory response to regulatory concerns regarding the lack of specificity and uniform practice in the LTCI reserve adequacy tests.

Overview: AG 51 requirements are effective for reserves reported with the Dec. 31, 2017, and subsequent annual statutory financial statements. It is applicable to insurers with more than 10,000 inforce LTCI contracts as of the valuation date and applies to LTCI contracts directly written or assumed through reinsurance. AG 51 requires these insurers to perform an asset adequacy test specific only to all inforce LTCI business, independent of results for any other block of business in their portfolios. For the tests required by AG 51, insurers must segregate the portion of their assets supporting their LTCI liabilities and compare it to their currently held LTCI reserves.

The analytical methodology used for AG 51 should be consistent with the Actuarial Standards Board’s Actuarial Standard of Practice No. 22, Statements of Opinion Based on Asset Adequacy Analysis by Actuaries for Life or Health Insurers (ASOP No. 22). According to ASOP No. 22, multiple asset adequacy analysis methods, including cash-flow testing (CFT) and gross premium valuation, are appropriate for this analysis.

AG 51 requirements differ depending on whether CFT is used as the analysis method. When CFT is used, the insurer must allocate investment income to the LTCI block of business in a manner consistent with the way investment income generated by the company-wide general account is managed. If the insurer uses a segment of the company-wide general account to manage the LTCI business investment risk for purposes other than performing the AG 51 asset adequacy analysis, the investment income generated by assets from that segment should be appropriately represented for the AG 51 asset adequacy analysis. The investment income determination is related to the discount rate used in the analysis. Should the CFT LTCI asset adequacy analysis indicate a reserve deficiency in the LTCI block, the deficiency may be offset with sufficiencies in reserves from the insurer’s other blocks of business. If sufficiencies from other blocks are not available to offset the reserve deficiency in the LTCI block, then additional reserves must be established.

When CFT is not used, the discount rate used in the AG 51 asset adequacy analysis must reflect consideration of the yield on current assets held to support reserves for the LTCI block of business. It also must consider future yields on assets purchased with future premium income and reinvestments. If the other-than-CFT LTCI asset adequacy analysis indicates a reserve deficiency in the LTCI block, the deficiency may not be offset with sufficiencies in reserves from the insurer’s other blocks of business. Instead, additional reserves must be established in order to offset the deficiency.

The AG 51 GUIDANCE DOCUMENT has been issued for year-end AG 51 filings.

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NAIC Center for Insurance Policy and Research (CIPR)

Eric King
Senior Health Actuary

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