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.