Over the last 2 years, several insurers have walked from the long term care insurance field, jolting producer and consumer confidence. Allstate Life announced its Lincoln Benefit Life subsidiary will leave the market in 2005 for instance. Earlier, Aegon and Kanawha announced they will stop writing new business in 2005.
With 76 million baby boomers approaching the senior years, and cost of care becoming ever more expensive, what is the meaning of this and the prognosis?
As to why, it appears insurance companies are becoming risk averse–and LTC represents considerable risk coupled with lots of uncertainty.
People buy the policy today and expect to pay premiums for years before having a claim. The collected premiums go into reserves to be used to meet these claim obligations. This “long tail” has insurers (and rating agencies) spooked. How much will care cost 20 years from now? How long will these claims last? How many people will actually go on claim?
The questions persist in part because new treatments, medications, healthier lifestyles and technology mean that knowledge gained from past experience may have no bearing on the future.
Further, when predicting financial performance for long terms (think, 20 years), assumptions used to price these policies become very sensitive. In the past, the industry missed pretty badly on predicting both interest rates (which affect investment earnings on reserves) and lapse rates (which determine how many people will still own their policy at claims time).
If policies are underpriced, what can insurers do? Well, one might say, they can do what they always have done: raise rates.
But not so fast with LTC insurance! There is a huge public brouhaha about this course of action. Many carriers, particularly public companies competing for asset dollars, don’t want their names in the press under the negative cloud of “mistreating” senior citizens. Regulators aren’t too keen on being swept up in this, either. (Remember AARP is the largest and best funded lobbying group in the country.)
Therefore, many carriers have decided that if they have to go for rate increases, they would prefer to do it with a closed block of business, rather than continue to compete for new business at the same time.
Another factor influencing the market exits is focus. Carriers keep asking, “What is our ‘core competency’?” They realize they can’t be all things to all people. LTC is a complex product to manufacture and administer. From underwriting functionality and cognition to paying claims that are ongoing episodes, LTC requires certain knowledge, infrastructure and systems. All of that comes with a hefty price tag. So, as companies examine priorities and consider the LTC business, many have concluded LTC doesn’t make their list.
Does all the above mean imminent death for a producer’s LTC business? Hardly.
Despite the market exits, many carriers remain strongly committed to this product. Some are among the largest financial institutions in the country. Just look at the top 10 LTC writers today compared to 10 years ago, and it is clear that some of the “big boys” have decided to build market share in the LTC space. These companies are signaling they are here to stay–by investing in new products, platforms and distribution, for instance.
On the bright side for the carriers, new pricing assumptions resulting in higher rates now are producing the type of profits insurers need to meet their return thresholds. Also, underwriting and claims knowledge has expanded greatly over the past 5 years, giving carriers more comfort in assessing risk and managing claims.
On the public policy front, the government-sponsored LTC awareness campaign, “Own Your Future,” has launched its 5-state pilot. Reports indicate 8.5% of all residents contacted requested the toolkit to help them plan for LTC. There is talk about expanding this program.
There is also talk about expanding the LTC Partnership program currently available in only 4 states. Can a tax incentive be far behind? No one can ignore the growing population and skyrocketing costs facing the public programs of Medicare and Medicaid. Every bit of publicity and awareness helps.
Believe it or not, now is the time to recommit to this business. A number of certifications and education programs are now available to assist advisors with this. A number of prestigious carriers want to write business. And many marketing organizations want to help advisors become successful with LTC.
In any time of uncertainty, there is always opportunity. If other advisors decide to back away from LTC, that means there will be more market for those who stay.
No one denies there have been a lot of LTC insurance curveballs in recent years. But the industry will survive and prosper. The only question for advisors is, how can I take advantage of this?
Peter Goldstein is executive vice president-business development for The Long Term Care Group in Long Beach, Calif. His e-mail address is PGoldstein@LTCG.COM.