Long-term care insurance (LTCI) agents and insurance company executives know in their guts that the people who have a hard time qualifying for LTCI tend to be a high-risk group of consumers.
But an economist at Harvard University, Nathaniel Hendren, now has explored how undisclosed information about health problems and other risk factors affects the individual LTCI market in a formal academic working paper posted by the National Bureau of Economic Research.
Hendren also looks at how consumers’ hidden knowledge of risk factors — “private information” — affects the individual disability insurance market and the individual life insurance market.
In theory, people who end up getting individual LTCI or other individually underwritten insurance products could be hiding as much dirty laundry as rejected applicants.
In the real world, rejected applicants seem to have more private information that could affect the applicants’ need for LTCI, disability or life insurance benefits, Hendren says in the paper, which is based on a chapter from a thesis he wrote while at the Massachusetts Institute of Technology.
The rejected applicants appear to have so much private information that, even if insurers did try to sell the applicants coverage designed for high-risk buyers, the insurers “would be so heavily adversely selected that it wouldn’t deliver positive profits, at any price,” Hendren says.
For the applicants who do get coverage, the amount those applicants would have to pay to compensate insurers for private information seems to be close to zero, Hendren says.
For the rejectees, the “implicit tax” needed to compensate the insurers for the effects of private information seems to be 42% in the individual life market, 66% in the individual disability market, and 82% in the LTCI market, Hendren says.
Hendren also found evidence that even healthy individuals begin to accumulate private information at age 80.
In the introduction to the paper, Hendren notes that 4 large U.S. health insurers rejected about 1 in 7 of the applicants who applied for individual or family health coverage from 2007 to 2009, and that an LTCI carrier concluded in 1995 that about 12% to 23% of 65-year-olds already had health problems that would keep them from qualifying for commercial LTCI coverage.
Economists normally would expect to see insurers try to get the business of people with health problems by offering them coverage with prices set to adjust for a higher level of risk, Hendren says.
“Regulation does not generally prevent risk-adjusted pricing in these markets,” Hendren says. “So why not simply offer them a higher price?”