Due Diligence On LTC Insurers: What You Need To Know
Determining which long term care insurance policies are adequately priced and what the carrier is likely to do if a rate increase is needed, is a daunting task for agents and clients alike.
Since it is so difficult and subjective, many feel the best answer is just to pick the lowest price or the largest company and hope for the best.
Fortunately, thats not the only solution. There are some definite characteristics that the diligent agent can examine to help predict the adequacy of a companys pricing structure.
Probably the most important factor in a solid LTC insurance program is the thoroughness of the underwriting. Remember, the cost of any LTC program is a ratio (usually around 60%) of total claims, including those that should have been avoided, to total premiums collected. That means allowing only healthy individuals into the risk pool will minimize the programs cost.
Therefore, look for thorough underwriting. A prime indicator is a company that obtains medical records for anyone not employed full time, over age 65, or with admitted medical conditions. Also, check out whether the insurer requires a face-to-face assessment for applicants over age 70; this is necessary to avoid cognitive LTC claims (the most expensive type).
Finally, consider the competence and expertise of the underwriting staff. When underwriting errors are made, either due to incompetence or inexperience, it is no less costly to the pool than a purposefully issued policy from a liberal underwriter.
The next most important indicator of a solid program is the loss ratio experience of the carrier. Fortunately, there is a readily available publication to help determine a companys loss ratio experience. This is the Long Term Care Insurance Experience Reports, published each year by National Association of Insurance Commissioners.
This report shows the durational loss-ratio experience for each company selling LTC insurance, allowing an easy comparison of experience by duration. A careful review of this information readily exposes companies whose experience is out of line with the rest of the industry. In particular, focus on the actual loss ratios (not the anticipated loss ratios) and how they compare to the industry averages.
There are several more subtle indicators of premium adequacy.
Analyzing the policy-benefit structure is one of these. A policy that offers significantly richer or more easily accessible benefits should have correspondingly higher premiums. Some insurers offer very liberal benefit definitions, yet charge premiums similar to insurers with more restrictive benefits. (This is a particularly noticeable problem with some non-qualified LTC plans.)
Similarly, commission structures provide an indication of premium adequacy. Obviously, a company that in aggregate provides more commissions will of necessity require correspondingly greater premiums to support them.
Perhaps the most difficult part of due diligence is analyzing the company. A key part of this analysis is evaluating the expertise of the company.
Check out not only how many years the company has been in the LTC insurance business, but also the experience and background of the key decision makers. Also evaluate the expertise of any partner firmsan important issue in this market, where partnering with other carriers, administrators and reinsurers is quite common.
Another important factor in this analysis is the attitude of the company. For example, a company concerned with maintaining a quality reputation is more likely to price conservatively and provide stable premiums.
Conversely, a profit-driven company is more likely to choose aggressive premiums at the outset and then, if necessary, increase them to the full extent possible in order to maintain profits. A profit-driven insurer is also more likely to sell the block of business to the highest bidder if the business proves challenging to manage or if production falls short of expectations.
Finally, be wary of a company that allows exceptions (especially in underwriting) for its best producers.
Jim Glickman, FSA, CLU, MAAA, FLMI, is president of LifeCare Assurance Company, a Woodland Hills, Calif. LTC reinsurance company, and organizing committee chair for the Society of Actuaries Annual Intercompany LTCI Insurers Conferences. His e-mail is: Jim.Glickman@ltcadmin.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, January 21, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.