As LTC Grows, So Will Reinsurers Role
In the competitive but promising long term care market “everyone is looking for the edge,” but to date reinsurance is playing a relatively modest role in delivery of the product to market.
Estimates vary over how big that role is. One estimate places direct writers penetration of the potential market at 7%, with 3% of that business reinsured. Others say LTC writers have penetrated 15% to 20% of the market with nearly 10% of that total ceded to reinsurers.
Just what the market represents is not clear-cut either because different estimates have different criteria for age range and salary, interviews suggest.
That said, those interviewed contend that reinsurers are poised to play a larger role as sales of long term care insurance grow.
Data from LIMRA International, Hartford, Conn., gives a sense of the potential the LTC market offers for both insurers and, thus, reinsurers.
Year-to-date figures through third quarter 2002 showed $662.8 million in total new premium, 10% higher than in the same 2001 time frame. New lives insured totaled 366,216, a 5% increase over the year before.
“It has to take place in the next five years. There are huge capacity issues. The demand for long term care insurance will increase,” says Richard Pittbladdo, president, LTC Global Solutions, Reno, Nev.
Reinsurers will play some role in honing that cutting edge, but may take an even bigger role as a facilitator, interviews indicate.
Indirectly, reinsurance helps with product innovation because it allows new players with new ideas who are still small to participate in the LTCI market, Pittbladdo continues.
The reason for this, he explains, is that there can be a real financial strain when a company first enters the market caused by high first-year commissions as well as risk-based capital requirements. In short, “LTC consumes a lot of capital.”
For noncancellable individual long term care business, the risk-based capital factors are 35% of the first $50 million of earned premium and 15% of any remaining premium over $50 million.
For other individual and group long term care business, the risk-based capital factors are 25% of the first $50 million of earned premium and 15% of any remaining premium over $50 million.
Thus, if a company is growing fast enough, RBC needs make it harder to make money, he continues.
Larger LTC carriers on the other hand, may not have as great a need for reinsurance, interviews suggest, because their blocks of business are large enough so that even big claims are relatively small compared with the block of business in force.
Indeed, John Hancock Financial Services, a large direct writer of LTC, assumed a block of business from Fortis because it helped make the block larger, reducing volatility and unit expenses, says Loida Abraham, second vice president, LTC with John Hancock, Boston.
Speaking of reinsurance, Abraham says it “can provide additional expertise in product development. It is still a young industry, and it is good to have a second pair of eyes.”
Reinsurance, she explains, can help in a variety of ways: product design, pricing and underwriting; sharing morbidity risks, interest rate and lapse risks; and, a broad understanding of experience from a number of carriers.
Reinsurers help with new product innovation, says Andy Perkins, senior vice president, General Cologne Re, Stamford, Conn., and they can also warn an insurer when a proposed innovation looks financially dangerous.
But transfer of risk and reduction of volatility are real strengths that reinsurers offer LTC writers, he continues.
“Everyone is looking for the edge,” says Dan Cathcart, vice president, pricing and product development with ERC Global Life & Health, Avon, Conn.
Reinsurers can provide that edge through traditional risk transfer and through turnkey solutions, says Nicholas Von Moltke, president USA Health, a division of ERC Global Life & Health, Overland Park, Kan.
If a reinsurance agreement includes product development, the reinsurer can bring knowledge and the direct writer an understanding of what the market needs, information developed from working with clients in the field, Von Moltke says.
That data is what a lot of carriers go to reinsurers for, he adds. Either they dont have the data or it would be too expensive for them to do the research, he says.
In fact, Von Moltke thinks that available data will make it possible to offer hybrid LTC products that are more linked to savings. The data is available to offer a product that combines universal life and LTC features, he says, adding it is really a matter of deciding how to structure and sell the product.
There are some products in the market that address combination of coverages, Cathcart says, but many more innovative possibilities exist.
There has not been a significant emphasis in the combination product direction, he continues, but in the future as the concept of both LTC and a combination of asset protection becomes more acceptable, there likely could be much more sales development in that area.
And for insurers who need to be able to offer a LTC product but who are not interested in developing necessary capabilities for a full program, reinsurers can provide a turnkey program, Von Moltke adds.
These programs allow a direct writer to develop products with desired features and split the risk, says Jim Glickman, president and CEO with LifeCare Assurance Co., Woodland Hills, Calif.
Most reinsurance used today is quota share where both direct writer and reinsurer share the risk, says Dawn Helwig, a consulting actuary in Chicago with Milliman USA.
A shared risk arrangement provides reinsurers a comfort level because “the risk and newness [of the market] can give them a little trepidation,” she says.
And, Helwig continues, the use of reinsurance gives direct writers the comfort of a “cross-check” on assumptions and pricing because reinsurers often take a more conservative approach.
Long term care product development may have been made easier by using reinsurance but newer features such as limited pay options probably would have developed anyway because of market demand, she says.
The evolution of the LTC market, and, consequently, how it is reinsured, is continuing, says Andy Castillo, vice president and actuary, Munich American Reassurance Co., Atlanta.
For instance, Castillo says the longstanding premise has been that people want to avoid entering an institution and would prefer to stay at home. But, he continues, given the upscale nature of some assisted living facilities, the premise may need to be reevaluated.
Reinsurers also offer direct writers perspective on benefits they plan to offer. For example, he says, if a direct writer wanted to pay a daily specified benefit for a month and the amount was not financially sound, a reinsurer might suggest a more reasonable daily benefit.
This is particularly important today given the weight of ratings assigned by rating agencies, Castillo says.
Reproduced from National Underwriter Edition, February 17, 2003. Copyright 2003 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.