Long term care insurance agents appear to be reacting glumly but calmly to John Hancock Life Insurance Company’s announcement that it is filing for long term care insurance rate increases averaging 40%.
The increase, along with Hancock’s announcement that it was suspending group LTC sales at least temporarily, “doesn’t bode well” for the LTC insurance industry, says Peter S. Gelbwaks, president of Gelbwaks Executive Marketing Corp., Plantation, Fla.
Hancock, Boston, a unit of Manulife Financial Corp., Toronto (NYSE:MFC), has been one of the pillars of the LTC insurance industry.
But Gelbwaks says he feels the rate hike was necessary, and he points out that a number of LTC carriers have raised rates for in-force policies in the past few years.
“Here’s the concern: 90% of Americans still haven’t purchased a [LTC] policy, one reason being it’s too pricey,” Gelbwaks says. “At same time, the experience of the industry is proving, based on usage, that the products are actually underpriced. We need to reevaluate where we stand and look at product offerings more closely, if we all agree they’re underpriced, with people living longer and not lapsing their policies.”
If Americans think the product is overpriced, the industry needs to show them they need to look again, Gelbwaks says.
“We have to change our message and tell people why it’s such a good buy: Because people are using it,” Gelbwaks says. “We are paying millions in benefits.”
He predicts that single-premium sales will get a large boost as people look for guaranteed rates for LTC coverage.
As Hancock’s rate increase shows, “LTC insurance really is
entering a stage of new realities,” says Jesse Slome, executive director, Association for Long Term Care Insurance, Westlake Village, Calif. “Basically, more people are going on claim, claims are lasting longer, and insurers’ investment returns are lower than ever. You have the triple whammy.”
The increase gives agents “some good news and bad news” about LTC insurance, Slome adds.
“The good news is that more people are using it than expected, they’re on claim longer, and they’re being paid more money,” Slome says. “The bad news is that because claims are so much higher, premiums are more costly.”
Tom Riekse Jr., managing principal at LTC Insurance Partners L.L.C., Libertyville, Ill., a brokerage general agency, says, “All we can do is to go ahead and make moves to keep this block healthy and make it sustainable over a long period of time. Advisors who sold these policies are not going to be happy, because they didn’t anticipate the increase.”
Clients are getting used to increases, Riekse says.
“To Hancock’s credit, although premiums are going up, they are paying $1.5 million in claims a day,” he says. “That is what people buy these products for.”
Cameron Truesdell, chief executive of LTC Financial Partners L.L.C., Kirkland, Wash., thinks meager investment returns have hit insurers far harder than anyone would have thought possible.
“It used to be a reasonable assumption they’d get an investment yield of 5%,” Truesdell says. “Instead, it’s been 2%.”
If an insurer does $1 billion in business and holds on to that cash for 20 years at 2%, it would have $1.5 billion in the bank. If it had earned 5% on that same money, it would have wound up with $2.6 billion, Truesdell says.
“It’s not unreasonable to assume 5%, but what it amounts to is the consumer got one heck of a deal for 20 years,” he says.
Agents get skittish when carriers raise rates, Truesdell observes, but he says his experience has been that lapse rates following in-force increases have totaled no more than 1% of policies. (One reason that is the case is because when LTC carriers raise in-force rates, they allow policy owners to convert to a policy with reduced benefits.)
“I think the utilization rates shows long term care insurance is a good investment,” Truesdell says. “Utilization is higher than even carriers had foreseen. This validates to the consumer how important this product is.”