The Plus Group

The Long Term Care Insurance Industry went through a major change early this decade with the introduction of rate stabilization legislation throughout the country.

The Long Term Care Insurance Industry went through a major change early this decade with the introduction of rate stabilization legislation throughout the country. This legislation removed the minimum loss ratio requirements and replaced them with a requirement that products be priced with the ability to withstand moderately adverse experience without needing a rate increase. In conjunction with this legislation, is a retroactive penalty (58% loss ratio on the original premium and 85% on the increased premiums) that companies must live with on rate stabilized policies if a rate increase is ever required.

Over the next several years those companies that decided to continue in the LTCI business each developed new products with much higher prices, designed to comply with this new legislation. The companies that decided to exit applied this new, higher pricing structure to their existing products in the form of a significant rate increase (or series of increases). The impact on sales was quite predictably, “sticker shock” primarily from agents, but also from their clients.

As a result of the increased scrutiny from this legislation within each company, many of the companies decide to either exit that business or deemphasize the riskier benefit structures that are most beneficial to the consumer. Adding to this mix was a negative outlook for the LTCI industry from investment analysts, insurers seeking higher returns on equity for their LTCI business lines, a need to replace shrinking new business, and most recently the worldwide financial crisis.

The route that most of the industry has pursued to deal with these challenges has focused on minimizing risk to the companies, primarily by building a case for short benefit periods and less inflation protection. The industry knew that this approach would help satisfy corporate management’s concern about minimizing risk, while hoping that by making the cost seem more affordable, the industry would successfully penetrate the middle income markets by a greater margin than it would lose from its primary markets of the upper middle and upper income markets.

At the time that the rate stabilization legislation was passed, the industry’s new business volume had been growing at about 10-15% per year with the oldest of the baby boomers still about a decade away from retirement and the youngest baby boomers just turning 35. The industry at that time was promoting the theme of lifetime benefits, 5% compound inflation protection, and comprehensive benefits with the target market being the upper middle class and wealthier 55 to 70 year olds. Given the relatively low 60-65% loss ratios being targeted for benefits, there clearly needed to be a small risk of a relatively large claim to justify buying this coverage on the part of the consumer. That risk was, in fact, present, in the form of a potential claim (especially for cognitive issues) that could readily last ten to twenty years (or even longer) 30 to 40 years after the policy was purchased (a claim that could well cost $5-$10 million, but would have much less than a 1% chance of doing so). This was clearly a risk that even the more wealthy individuals could want to insure.

Unfortunately, when rate stabilization came into play, the industry found itself having to deal with new business rates that were 40% higher, and even larger rate increases on inforce business from companies deciding to exit the market at that point. I believe that had the industry accepted the short term disruption of the “sticker shock” and stayed the course on promoting the consumer values of lifetime benefits and 5% compound inflation protection, it would be much better positioned for growth today. Instead, the industry tried to create the image that a “short and fat” benefit was actually better for the consumer (when in fact it is really only better for the insurers), and was the correct path for the agents to sell and the consumers to want to buy.

Now let’s fast forward to the present. Congress has recently passed the CLASS Act as part of the health care reform act. The country has just gone through the worst financial crisis since the great depression. Two of the three largest LTCI companies have announced their exit from offering lifetime benefits, together with sharply increased prices on new business rates (especially the 5% compound inflation protection). It is yet to be seen if the third (and largest LTCI company) will soon follow suit.

Interestingly, the passage of the CLASS Act, and the financial crisis have created a tremendous opportunity for carriers (especially those who have recently entered or decide now to enter) to capture a significant market share selling to the wealthiest 30% of the market place (where there is less than 25% market penetration) comprehensive lifetime benefit plans with compound inflation protection.

In the case of the CLASS Act, the government plan will be priced at approximately $5,500 per year for a couple for a lifetime benefit period plan which will only average $50 of cash per day. Since it is guaranteed issue regardless of health impairment and required to subsidize the poor from participants earning above the federal poverty level, the likely result is that most of the participants will have significantly health problems that make them ineligible for underwritten LTCI. Likewise, because of the high price, the private industry will be able to provide more benefits for a lower total cost to those who are healthy,. Meanwhile, the government will spends millions of marketing dollars educating the public about the need for LTCI and the availability of the CLASS Act (especially to those that cannot qualify for a private plan).

The financial crisis has had a different, but equally opportunistic effect for future sales by making those with assets realize that they need protection against the erosion of those assets, especially from catastrophic events such as a prolonged LTC event. Where they may have resisted buying long term care insurance in the belief that they had (or will have) sufficient funds to cover any eventuality, they are now much more cognizant of how quickly that money can diminish (even without a long term care event). This wealthier consumer, who clearly can self insure a 3 to 5 year event, is much more likely now to see the need and be a customer for the a comprehensive, lifetime benefit, 5% COLA policy, if approached by an agent with the pertinent information.

It seems to me that the industry should be focused on the consumer’s risk of outliving their life expectancy and the tail risk associated with a prolonged stay, rather than focusing on the misleading statistics of 50% of those receiving LTC are under 65 or the 75% risk of someone age 65 needing at least one day of LTC before they die. The first statistic is misleading because the risk of a healthy person needing LTC for more than a year prior to age 65 is only 1 in 50,000. The 50% statistic is only accurate (although misleading) because it measures chronically impaired lives under 65 that would never qualify for coverage together with the dramatically higher population under 65. The second statistic is even more misleading because it includes all very short stays (that are not as much of a financial risk as the premium commitment) together with events that occur to the uninsurable or are already reimbursed through Medicare.

In conclusion, while there is a place for limited benefit period plans, a concerted industry effort to promote the lifetime inflation protected need would likely have much more opportunity for industry success. The attempt to convince a reluctant consumer that a short benefit period with limited inflation protection is the best alternative is likely to have the same chance for success, that this purchase is likely to have in protecting the consumers assets.