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Fitch: LTCI Market Faces Uncertain Outlook

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Analysts at Fitch Ratings give long-term care insurance (LTCI) poor marks in a review of the statutory results of U.S. individual LTCI operations.

The analysts at Fitch, Chicago, head the review with the assessment, “Unfavorable Results; Uncertain Outlook.”

“The need for long-term care insurance is well-documented,” the analysts write. “The graying of America is expected to accelerate with the baby boomer generation starting to turn 65 beginning in 2011.”

But growth in LTCI premium production and covered lives has stalled, market share is more concentrated than in other major insurance markets, and the regulatory environment is still uncertain, the analysts say.

The U.S. Department of Health and Human Services (HHS) has been considering a proposal that could limit LTC insurers’ ability to use applicants’ family history or genetic testing results in underwriting, the analysts say.

But the analysts say the biggest problem with the LTCI line has been a combination of a need for high reserves and the difficulty of pricing a relatively new product.

Acquiring a customer is expensive, and reserving requirements are high, because of the need to anticipate the likelihood that claims will be much higher in the future than they will be in the near term, and that policyholders who do file claims could collect benefits for a long time.

In a table based on statutory data from the major U.S. individual LTCI writers, the analysts show that total LTCI earned premiums increased to $6.6 billion in 2010, up from $6.3 billion in 2009, and up from $4.9 billion in 2006.

But the incurred loss ratio – the ratio of claims already made to earned premiums for the companies in the table – increased to 64% in 2010, up from 57% in 2009 and up from 44% in 2006.

The interest adjusted benefit ratio, or sum of incurred claims and changes in active life reserves minus investment income dividends, divided by earned premiums, increased to 104% in 2010, up from 102% in 2009, and down a bit from 107% in 2006.

“Based on various industry sources, original pricing assumptions were projecting an interest-adjusted benefit ratio in the 60-65% range,” the analysts say.

Some in the LTCI industry have suggested that claims problems have had more to do with policyholders’ greater-than-expected loyalty to their policies.

The Fitch analysts say they think claims incidence also has been higher than expected.

“Morbidiy results have been negatively affected by higher severity and incidence,” the analysts say.

The Federal Reserve Board has worked to hold rates down since 2008, in an effort to cushion the effects of the weak economy.  Slump-related credit losses and the low interest rates have both hurt LTCI carriers’ earnings, the analysts say.