The Pension Protection Act’s qualified long term care insurance provisions for annuities and life insurance contracts will become effective on Jan. 1, 2010. But insurers are already gearing up to address the related opportunities and challenges.
The changes require new, appropriate, effective and executable business strategies. PPA-related life product development, involving LTC riders, has been surprising, but this discussion will focus on implications for the annuity business. Here, insurers must address 5 critical categories:
1) Breadth. Under the PPA, LTC vehicles can be added to deferred annuities and immediate annuities, and to fixed annuities, variable annuities and indexed annuities. Within each of these, they can be added as well to living benefit riders.
A company has to develop a comprehensive strategy for dealing with all of them or determine a focused strategy that tests out the appeal on a particular market and product segment. The latter certainly makes a great deal of sense. The feeling is: get it right in one segment, work out the kinks and expected/unexpected challenges, and then move on to other segments.
A number of insurers are choosing their first forays to be in the fixed and indexed arenas–a decision based in part upon the measured favorable reactions of their distribution in those segments.
Interestingly enough, companies have not chosen to wait until 2010 for introduction. This means that, should these designs provide for benefit payouts in 2008 or 2009, such payouts would not have the favorable tax treatment applicable in 2010 and thereafter. However, the insurers will have gleaned valuable market experience even earlier.
2) Designs. Though some designs aren’t yet public, it appears that companies, in both the variable and non-variable businesses, are apparently favorable to offering enhanced payout riders. For example, VA guaranteed minimum withdrawal benefits provide payout streams that reflect a company guarantee of minimum performance. LTC riders that enhance the payout stream in case of chronic illness make sense, because the enhancement timing is optimal.
3) Underwriting and administrative concerns. Most but not all insurers are moving in the direction of having minimal underwriting, preferring to control risk via product design. Of course, the overriding concern driving the choice of limited underwriting is distribution system culture and practices on existing products.