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.
Whether the companies pay out the combined benefit during chronic illness on a reimbursement or per diem basis is still an open question. Certainly the per diem approach is simpler, but there is a need to check whether the payout limits are within the Internal Revenue Code Section 7702B per diem limits. Of course, properly reflecting taxable payments in a tax return is the individual buyer’s responsibility. The reimbursement payments are fully non-taxable, but the insurer will need to determine that the payments are for qualified LTC expenses.
Speaking of claims, insurers are generally but not unanimously opting to use administrative claims providers for back office operations. Most want to see market expectations for this business realized before funding a fixed overhead type operation.
4. Pricing and financial issues. Many insurers interested in this segment are not in the LTC business at the start, and they appear to have several concerns. One is lack of available morbidity experience and expertise. Plentiful experience is available from administrative vendors and consultants, though suitable modifications–such as for minimal underwriting and benefit patterns–may be necessary to take into account the business circumstances underlying these new offerings. Consulting firms can design and price vehicles as well as guide contract filings through the states.
Many insurers, at least initially, appear to want to limit their exposure to this risk–which, to them, is relatively unknown. Reinsurance is available for this purpose, and more reinsurers are expected to enter the market as the business grows.
5. Marketing and training. For this new market opportunity, companies are strongly urged to focus on marketing and training issues. Training wholesalers to train reps on how to identify appropriate clients and identify appropriate amounts, to name but 2 considerations, is essential to helping reps integrate LTC into their arsenal. Using LTC in VA guaranteed minimum withdrawal benefits, for example, provides clients with downside protection on LTC expenses as well as asset performance, a powerful combination.
Insurers wishing to be ready for the emergence of this major product line need to move with all deliberate speed and thoroughness to make it happen.
Cary Lakenbach, FSA, MAAA, CLU, is president of Actuarial Strategies, Inc., Bloomfield, Conn. E-mail him at firstname.lastname@example.org.