While there certainly is no shortage of potential long term care insurance customers, and awareness regarding the need for LTC insurance has never been higher, LTC sales have just recently flattened, after several years of decline.
Popular opinion appears to hold that LTC sales are finally ready to turn the corner. But what will drive this change?
After all, insurance companies continue to search for ways to differentiate themselves at a time when products are somewhat homogenized, underwriting has tightened and marketing emphasis has narrowed to younger, healthier, married couples. Furthermore, the LTC companies seem to be chasing the same, limited supply of producers–at a time when many producers, particularly non-LTC specialists, have turned to other products due to concerns about LTC price adjustments, product/sales complexity and rejection rates. These same challenges have prevented other channels–e.g., retirement planning and wealth preservation professionals–from embracing LTC insurance as the important tool it is.
The LTC pricing adjustments–reflecting among other things lower lapse rates and increased utilization of the evolving LTC delivery system–are here to stay.
So, should the industry patiently wait for LTC insurance sales to be spurred by an above-the-line tax deduction, or more effective implementation of rational Medicaid eligibility rules? Or, instead, should the industry address the product’s other challenges, i.e., tightened underwriting windows and sales/product complexity, more directly in the meantime?
Impaired risk products and underwriting can be the solution to the LTC market’s needs. The impaired risk opportunity goes well beyond placing business the industry is currently rejecting that could be insured profitably. But let’s start here.
Given a generally-accepted industry average rejection rate of 20%, $150 million in LTC premium is currently turned away every year. Assuming a third of this business needs to be rejected for cognitive reasons, this leaves $100 million in potentially-issuable premium. Based on our impaired risk experience, and with the proper pricing structure, we estimate at least half of this business can be insured profitably. That’s $50 million in additional premium a year.
This alone is no small nut. It surpasses the annual production of all but the top few LTC insurers. But there is more. There is also the business that LTC professionals have been conditioned to pass over because they know it won’t get issued. Diabetes with a heart attack 4 years ago? Forget it. Producers don’t want to spend time on business that doesn’t get issued, and this type of business won’t get issued until the industry recognizes its profit potential.
Perhaps more important is the untapped opportunity stemming from expanding traditional underwriting parameters to include impaired risk. This can be done if carriers use appropriately structured and priced products, some of which may be built specifically for impaired risk business. This will allow carriers to offer simplified sales and application processes that aren’t otherwise practical.
Capitalizing on this to make the LTC insurance solution much easier to deliver could be where the real potential of impaired risk LTC insurance lies.
Such changes can reinvigorate current LTC producers, beckon the return of those that have focused on other products, and appeal to other financial advisors.
If the potential of impaired risk LTC insurance is so great, why hasn’t it already gone mainstream?
One reason is that there has been a misperception that expanded underwriting is synonymous with loose underwriting and cannot, therefore, be profitable. Make no mistake, to be successful, a properly-deployed impaired risk approach requires thorough evaluation of risk and consistency. In addition, impaired risk business should not be viewed or managed as a loss-leader aimed at getting healthier business. That said, impaired risk LTC business can and should be priced to stand on its own and to attain rewarding profit objectives.
Another reason is that the experience and expertise needed to price products and underwrite impaired risk LTC business was not, in the past, readily accessible. The option of dipping toes into the waters allowing the experience to develop through what could be years of trial-and-error was not attractive to top-rated LTC insurers.
Yet impaired risk stratification has been proven successful in other lines. The opportunities that are present for this to happen in the LTC insurance market may be greater than anywhere else.
Jim Heyer and Todd B. Armstrong are partners in Envision LTCi, LLC, a long term care insurance risk management consulting firm in Allentown, Penna. They can be reached at firstname.lastname@example.org and email@example.com, respectively.