Clarification: The statement regarding the Conseco trust mischaracterizes the situation. On Nov. 12, 2008, Conseco Inc. completed the transfer of Conseco Senior Health Insurance Company to an independent trust for the exclusive benefit of CSHI’s long-term care policyholders. This transaction was approved by the Pennsylvania Department of Insurance.
An unexpected announcement by MetLife that it will exit the long term care insurance market in less than two months stunned an industry that has been forced to endure an escalating series of negative announcements over the last three years. The industry has worked for years to meet the needs of baby boomers would begin crossing over into retirement age, and long term care insurance policy sales should be booming. But instead, the industry has been set back by decreasing sales, rate increases, blocks of business being taken over by state risk pools, and now the sudden departure of one of the leading carriers and brand names for retirement and long term care security.
This storm has been brewing for some time, but it became particularly evident in the last three years through a series of disruptive events emanating from the leading long term care insurers. In 2007, John Hancock and Genworth began raising rates by 20 percent on new policies sold. At the end of 2008, the Pennsylvania Insurance Department took over a large block of Conseco policies and moved them to a state-run risk pool to ensure they would remain solvent. In September, 2010, John Hancock made a stunning announcement that it would increase rates on in-force policies by 40 percent and would suspend group product sales, and in October, Genworth announced it, too, would again raise rates on at least 26 percent of its in-force business.
And then, a truly unexpected and major blow to the stability of the LTCI market came with the announcement that Met Life would abandon the long term care insurance marketplace effective Dec. 30, 2010.
The domino effect
The common factor for all this action seems to be incorrect pricing on LTCI costs attributed to carriers underestimating the longevity of policyholders and the level of policy persistence. Simply put, long term care insurers underpriced the products, and it has become increasingly expensive for carriers to keep policies on the books for longer periods of time at the original price for which they were sold. Solutions to this situation have come in the form of rate increases on new and existing business, abandoning blocks of business, and leaving it to the states to take over – or, as in most recently, exiting the market altogether.
Genworth attributes its rate increases to “persistency, or the number of people who will retain, rather than lapse, their policies over time – leading to higher claims than pricing assumed for these older policies.” Similarly, when John Hancock examined its claims experience between 1990 and 2010, it discovered “unfavorable claims patterns,” according to Marianne Harrison, president of John Hancock Long Term Care.
The carrier discovered that claims had doubled since it last examined its experience in 2006, and that the age group 80 and older had increased by a factor of 4. The length and severity of claims had risen in the same time period, while policy termination had decreased. The bottom line is that more people were living longer and using their policies for longer periods of time than had been expected.
“Put simply, more people used the insurance than anticipated, reinforcing the value of the product to policyholders, but creating a pricing issue,” Hancock said in a statement.
In the case of Met Life’s announcement to leave the market, these same factors are also true. In its statement, the carrier indicated that a major reason for leaving the market is that they have more customers cashing in on their long term care policies at the same time that the cost of care is rising.
“While this is a difficult decision, the financial challenges facing the [long term care insurance] industry in the current environment are well-known,” said Jodi Anatole, vice president of long term care products for MetLife.
Leaving at the time of greatest need
Of course, the irony of this situation is that Met Life is leaving the market at exactly the time that consumers more than ever need private market options to help pay for long term care. Starting in 2011 as many as 10,000 baby boomers a day will start going onto Social Security and Medicare. Those social safety net programs are already under tremendous stress to keep up with the current population’s demands. Combined with a weak economy undermining the availability of tax dollars to sustain them, these programs will start pushing the financial responsibility for long term care back on individuals and their family members. State Medicaid programs are under enormous stress to keep up, as well, and are also cutting budgets, increasing barriers to entry, and more frequently emphasizing long term care self-funding As the economy continues to search for its footing and demand for access to these programs rise, this will be an escalating area of concern for all stakeholders across the country.
Chris Orestis is president and founder of Life Care Funding Group; a 15-year veteran of both the life insurance and long term care industries; and a frequent speaker, featured columnist, and contributor to a number of industry publications. His blog on senior living issues can be found at www.lifecarefunding.com/blog. He can be reached at 888-670-7773 or email@example.com.