Long term care insurers are developing extensive experience in managing claims and policies, developing more details on claims exposure, claims paid, and termination rates, a new study shows.
The Long Term Care Experience Study by the Society of Actuaries, Schaumburg, Ill., found voluntary lapse rates by policy holders dropped to 5.5% in the period 1985 to 2005, the time covered in the study, from 7.4% in 2002, when the society issued a similar report on the experience of U.S. LTC insurance carriers up to that point in time.
The lapse rate decline may be among the most significant findings of the study, because LTC insurers generally acknowledge that they had overestimated lapse rates early in the history of LTC insurance, leading to initial underpricing of policies. This was followed by substantial rate increases, which many believe contributed to a decline in sales in the past several years. Now that insurers have developed better data on persistency, presumably such misjudgments won’t recur.
“Most surprising, we did study lapse rate by how expensive coverage was and found the least expensive tended to have the highest lapse rates and the most expensive had the lowest,” says Roger Gagne, assistant vice president of actuarial services for long term care for John Hancock Life Insurance Company, Boston, a contributing author to the report.
“Compared to life and disability insurance, long term care is far more persistent,” adds Gary Corliss, chair of the SOA committee issuing the report and chief executive of Avon Long Term Care Consultants, East Hampton, Conn. “None of us thought that would be true when we got into this business in the mid-1980s.”
Gagne speculates that buyers of cheaper policies may not value them as much as other policy owners. “Perhaps the more expensive the policy, the more thought they put it into it,” he suggests.
Gagne also noted policy persistency for married policyholders was heavily influenced by whether both individuals were covered. Many carriers offer marital discount if both buy, he notes.
“Obviously, it’s a better value, and there’s also a shared sense of need. You’re not going to let yours lapse and then let your spouse take care of you.”
SOA also found the number of people filing claims on their policies almost doubled since the 2002 report, from 95,000 by year-end 2001 to just over 172,000 by 2004.
In addition, the percentage of claims involving only home or community care as opposed to nursing-home care almost doubled, comprising 26% of the claims paid in the most recent study, up from 15%. Nursing-home-only claims dropped to 55% of claims, compared to 80% just 3 years earlier. Another 19% of claims involved both nursing home and home care, up from just 5%.
An additional significant finding was that carrier exposure in terms of duration of benefits has been lengthening. SOA’s latest study found policies covering no more than 2 years of benefits declined to 35% from 43% in 2001, while policies covering 3 to 5 years of claims increased from 25% to 28% in the period.
The average issue age for LTC insurance fell to age 59, compared to 61 in 2001, SOA found. For individual policyholders, the average age was 64, down from 67, while the average issue age of group insureds was 46, compared to 47 in the earlier study.
Although most covered insureds were female, at 57%, their ratio declined slightly from 59% three years earlier.
The average age of claimants first submitting their claims was 78.9 years, one year younger than in 2002, while the average length of claim lengthened to 1,040 days, from 914 in the 2002 study.
Claim incidence rates as a percentage of issued policies fell slightly in the latest period studied, to 0.64% from 0.68%.
Average total termination rates, including lapses and policyowner death, dropped to 6.8%, from 8.9%.
For home care, the average number of weekly visits by home health workers was 3.2 per week, down from 4.2 in the previous study.
Among causes of LTC claims, Alzheimer’s disease led for total claims (24.3%) as well as for both nursing home care (26.7% of such claims) and home care (17.6%). It also led in terms of cost ($59,000 in average claim payments).
Alzheimer’s claims have become as prevalent as the next two most common causes combined–stroke (13.3%) and circulatory disorders (10.4%), SOA notes.
In terms of average cost, Alzheimer’s is followed by nervous system disorders ($50,000), stroke ($44,000) and mental illness ($43,000).
Alzheimer’s also showed the longest average claim duration at 659 days, ahead of mental illness (600 days).
Mortality among policy owners was around 1%, slightly above the 2002 level, with male mortality remaining about 40% more than for females, SOA found.
“We find people lapse their life policies much more often than their long term care policies,” observes Corliss. “That tells me people value long term care insurance more than life insurance at later ages.”
The report analyzed data from 24 insurers on policies issued between Jan. 1, 1984 and Dec. 31, 2004. Claims incurred on policies in force were followed from claim beginning through June 30, 2005 or claim termination, if earlier.