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.