Q. During the client appointment, I need to explain about rate increases – why they occurred and the future probability. How do you handle that conversation so that the prospect understands the reasons and still feels comfortable buying this product?
A. Understanding why rate increase have occurred is the first step. For that information, I turned to Jim Glickman, president and CEO of LifeCare Assurance Company and a past chairperson of the Long Term Care Section of the Society of Actuaries.
Jim identified four reasons:
1. The low interest rates we are now seeing.
Carriers expect to earn a certain amount from their investments. If they can’t, that presents a problem.
2. Low lapse rates.
Carriers that have been selling long-term care (LTC) policies since 1990 believed that lapse rates would be much higher. It is now under 1 percent — which is unknown for any other insurance product. A lapsed policy is more profitable for insurance companies because they have received the premiums, but when the policy lapsed, they do not have to return any cash values (as they would with life insurance).
3. Rate Stabilization Legislation.
This legislation went into effect in 2002. Rate stabilization changed the minimum loss ratio requirements — usually 60 to 65 percent — to a requirement that policies be priced very conservatively. The law also includes an explicit provision for moderately adverse experience and a significant penalty to the insurer if a future rate increase is ever needed.
Some companies reacted right away and increased new business rates quickly, while others reacted more slowly. By 2006, prices were 40 to 45 percent higher than in the pre-rate stabilization time.
4. Pricing of 5 percent compound inflation protection.
When the benefits go up 5 percent compounded, while the premium remains level, any shortfall in interest or lapse rates will have a significant major effect. (Inflation is running about 3 percent.)
Over a 40-year period, the 5 percent compound will provide more than twice as much benefit as the 3 percent compound. Since the vast majority of your long-term care insurance (LTCi) risk is associated with living too long, consider selling $150 at 5 percent. It will deliver much better benefits down the road than $300 with 3 percent.
According to Jim, if you separate the industry between companies that have been in the business before the year 2000 versus those that started later, the newcomers are in a better situation since they don’t have to contend with the legacy issues.
He concluded that the products we are selling today are very stable, as the industry has become quite conservative, the regulations encourage it and the present actuarial assumptions on lapse and interest rates have virtually no downside and plenty of upside.
Note from Margie – Next month’s column will focus on how I explain the reasons for rate increases to my clients.