The release in late September of a Moody’s Investors Service sector profile of long-term care insurance (LTCI) was filled with doom and gloom, and seemed to predict the demise of the offering itself.
Coming on the heels of some rather pessimistic predictions about LTCI feature availability from John Ryan of Ryan Insurance Strategy Consultants in Greenwood Village, Colo., (See “Too Much of a Good Thing?” Investment Advisor, September 2012), the report was nevertheless far more downbeat than Ryan had been about the future of the product. For advisors and clients who may be wondering whether LTCI is really on the way out, Moody’s sounded a cautionary note that warrants a closer look—while an industry trade group spokesman was considerably more upbeat.
The sector profile provided Moody’s assessment of some of the problems experienced by the industry as it sought to regain its footing after an apparent stumble into what turned out to be very expensive coverage—for the insurer. Now the expense is headed in the direction of the consumer, with rate increases having gone through a shocking rise in 2011, and the shoe may be on the other foot.
Although meant to correct a problem, the report says those rate increases have themselves become a problem—because of their effect on the market. John Hancock put through increases, Ryan reminded, ranging from 18% at the lowest to 90% at the highest, with the average coming in at around 44%. “The Hancock rate increase really shocked a lot of advisors,” he said, “and it shocked a lot of insurance companies, too. [Actuaries at other insurers were saying,] ‘What do they know that we don’t know?’”
Insurers had to do something. Boxed in by rising medical costs on one side, lower-than-expected lapse rates on another, and record low interest rates on a third, companies did the only things they could: exit the market altogether, as had Unum (group market) and Prudential (individual market), among others; eliminate or cut expensive features such as the lifetime benefit and the inflation protection rider; raise rates to levels that would restore profitability; or turn to hybrid products that offer a combination of life insurance and a limited LTC benefit.
However, the Moody’s report pointed out that even as insurers are constructing better-priced policies, they may be shooting themselves in the foot, either by turning off potential buyers or by being told by regulators that they can’t continue to raise rates—or, as Ryan suggested, being told by regulators once interest rates rise that they will have to give back some increases.
“Because it affects the elderly, the people we want to take care of most,” Ryan said, “the Hancock rate increase was […] outrageous. I don’t think they had any idea the damage they did by raising premiums 90% all at once.”
Ryan added that there is a very real possibility that sales will further decrease; currently, he said, they are either flat or down from what he has seen and heard in the marketplace. The Hancock rate increase, he said, so stunned anybody thinking of buying a policy that “they said, ‘There it is; they’re just going to do that to me, so I’ll self-insure.’ That, or they’re buying less coverage.” He went on to say that, while people are still buying, many who might otherwise do so now regard getting priced out of the product as a bigger risk than lacking coverage at all.