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LTCI: Here Today, Gone Tomorrow?

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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.

Jesse Slome, executive director for the American Association for Long-Term Care Insurance (AALTCI), disputed the idea that sales were down. In a statement at the end of September, Slome said, “Despite the departure of several leading insurers, sales of long-term care insurance through multilife plans as well as on an individual basis are increasing. The need has not diminished and the desire by consumers to have some protection in place is higher than we’ve ever seen.”

In an interview, he repeated that view, saying, “People are buying LTCI every day,” and defending rate increases. “You have historic low interest rates, you have increasing reserve requirements, and you have a regulatory environment where states are […] saying, ‘We won’t allow you to increase premiums,’” he said. “So what’s an insurance company to do? Lose money?”

One thing that is true, however, is that higher prices mean fewer potential customers. “When you raise prices, you shrink the size of the market of people who will buy your product,” said Slome. But that’s not necessarily a bad thing, he explained. “This is not an elastic market,” he said. “What that means is that if Genworth has a million policyholders and Hancock has a million—they’re not looking to double that next year. So the market for LTCI has always been defined, and in the current environment, the definition just becomes a little clearer.”

Moody’s says that the exit of some companies from the market, further concentrating remaining business in the hands of just a few companies, could also be a threat to the long-term survivability (no pun intended) of the market. But Slome took issue with that as well.

“Their analogy would be the same as calling Porsche a failed car company because they cannot make Porsches available for everybody who drives a car,” he said. “They can’t, and they choose not to. LTCI is the same way. More people are buying and applying. Now, yes, fewer people can and will afford the premiums, but at the same time you’ve got a stock market that’s hitting new highs. It’s not like nobody has money inAmerica.”

Drawing on what he saw in the disability insurance market as it gradually repriced or did away with more expensive features, Ryan said he would recommend that LTCI buyers not “waste time getting anything lower than a 90-day waiting period, [anything longer than] a five-year benefit period and [anything higher than] 3% compound inflation protection, because they will probably get priced out of it.” Those are the most common features, he explained, targeted by rate increases. In addition, they could consider contingent nonforfeiture provisions, so that if another 90% increase should come down the pike, at least they could salvage some coverage rather than forfeit all premiums paid.


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