As society has undergone significant demographic and technological change over the last few decades, the long-term care insurance (LTCI) industry has struggled to keep pace. In many cases, policies that were designed in the early 1990s are still being sold today. Though prices are significantly higher, benefit structures are largely unchanged.
LTCI products simply do not account for advancements in longevity, health care technology, or the changing nature of retirement planning. Similarly, the replacement of defined benefit pension plans with 401(k) accounts is not yet fully reflected in the design of most LTCI product offerings today. To a large degree, this is why the market is demanding new types of products that reflect today’s realities.
Of course, the lack of evolution in product design is not the only challenge LTCI insurers have faced recently. Lower-than-expected lapse rates and investment returns, as well as unintended coverage expansions, have placed real pressure on profits. Other factors that have limited growth and put insurers on the defensive include large premium increases, increased litigation and regulatory reluctance to approve rate increases.
Some industry veterans look at these issues and conclude that LTCI is a product line fraught with peril that is too difficult to model and requires excessively high capital. But, taking an alternative view, other stakeholders see significant opportunities to seize rising market demand for LTCI insurance. The key is for insurers to rethink and redesign LTCI policies so that they reflect today’s financial and demographic realities while meeting naturally higher demands for the product. Though more consumers want and need such products, carriers must find ways to reduce their risk exposure.
This article highlights five steps insurers can – and should – take to deliver such win-win outcomes in addressing the top issues and opportunities in LTCI.
1. Recognize the growth opportunity in demographic.
There are clear reasons why LTCI should be a growth engine for insurers. Rising health care costs – including those associated with assisted living and custodial care – are of great concern to the huge wave of retiring baby boomers. This population may look to LTCI policies as a vehicle to help protect against rising health care costs, which are a particular risk for older people.
See also: 5 ways to sell LTCI to boomers
As highlighted in other articles in this series, LTCI insurance has become an essential element in effective retirement planning. The design, sales and servicing of such products must reflect where LTC fits in consumers’ portfolio and overall outlook. The bottom line is that LTCI insurance is a product that nearly all retirees need. To date, however, policies have focused primarily on the higher end of the market – that is, wealthy and upper middle-class consumers who can afford the high premiums.
2. Design simpler products to attract more consumers and reduce risks.
Because long-term care insurance is fundamentally a retirement planning product, insurers can boost sales by creating simpler products that are designed specifically to protect assets against health care catastrophes. The insurers’ goal for products is to be simple and inexpensive enough to attract consumers on the broadest possible scale. Some industry observers would argue that scaled-down products with long elimination periods meet this need for catastrophic policies, though their limited adoption to date suggests that different products might result in more sales.
For instance, a commoditized, catastrophic LTCI product would need to reflect the reality that most “middle-market” consumers can’t typically afford combination products that require a significant lump sum deposit or upfront payments. Looking at traditional LTCI products, middle-market consumers will be highly sensitive to rate increases over time. Insurers that could get the premiums down to manageable levels (say $1,000 annually) would likely attract a great deal of attention from consumers who intuitively grasp the need for and the value of such products. Optimally, these policies would cover only the actual cost of care and services, regardless of where care is delivered (e.g., a home, nursing home or assisted living facility).
Another option would be to develop combination products, with both universal and long-term care (LTC) features, as some insurers have done. Accelerated benefits could be made available as an additional free feature or via a 10 percent to 15 percent in additional premium. These products can address the catastrophic needs of upper middle-class consumers, who can afford a large, single-premium payment and are not looking for a large death benefit. This is a win-win: carriers like it because consumers use their own money first to pay for LTC services; consumers like it because they receive benefits on an accelerated basis and because it’s not a “use-it-or-lose-it” product.
3. Streamline the buying (and selling) experience.
One significant advantage of simpler, commodity products is that they would be considerably easier for consumers and agents to understand. These products would simplify both the buying and selling process, though there are additional steps insurers can take to streamline the experience from the perspectives of both agents and consumers.
Looking at the selling side of the equation, the complexity of LTCI product makes it a hard product to sell. Few, if any, new agents want to focus on LTCI because it’s a complicated product with long sales cycles. Further, many agents are uncomfortable asking personal questions and collecting sensitive information about the health histories of their policyholders. Currently, LTCI policies require very specific information in long, applications that can reach 25 pages or more.
One alternative is to streamline the application process by focusing initial application process on knockout questions only. Then, nurses and other providers could be used to obtain fluids and follow up with more detailed questions for qualified prospects. More accurate responses from consumers for more real-time underwriting and an easier, more familiar process (which mirrors current life underwriting practices and eliminates potentially uncomfortable situations) make this a win-win approach that would also reduce the barrier to entry.
4. Focus on wellness to offer new value.
The extra efforts during the application process and future “monitoring” visits by health care professionals can help lead to more effective underwriting. In return, carriers can offer consumers such benefits as eligibility for reduced premiums, discounted gym memberships or reward points redeemable with specific merchants. The improved rating is an obvious benefit for carriers, while policyholders can save money on their premiums and lead healthier lives. Similar, win-win models based on increased information sharing are rapidly becoming the norm in health insurance. From required check-ups (such as those for pre-natal care) to the use of wearable technology, wellness promotion strategies have proven their value in health insurance and could easily be applied to LTC.
For carriers, the up-front investment is all about reducing future claims. “Fall-proofing” the homes of insureds and using advanced analytics tools to examine prescription databases for risky combinations of drugs are additional proactive steps that could help reduce risk and, thus, boost profits.
5. Share risk through experience-based plans.
Widespread uncertainty has been one of the major challenges in the LTC market. Some forward-looking insurers have reacted by adopting various risk-sharing strategies. For example, some products on the market today allow consumers to choose their own benefits, with premiums adjusted accordingly.
Then there are “experience fund” products, such as those available through the Federal Long-Term-Care Insurance program, in which premiums are adjusted based on actual outcomes. The benefit here is that the huge numbers of policyholders reduce or make the overall risk more predictable, with the potential of positive experience being shared with the consumers through premium rebates or enhanced benefits. Carriers may end up serving a primarily administrative role, but the value in terms of reduced risk is potentially enormous.
The bottom line is this: Given the past challenges in the LTCI market, many insurers may be reluctant to move forward with new offerings and new service processes. However, the rising demand merits action for carriers seeking new avenues to growth. As with the retirement planning space more generally, consumers in need of LTC products more than ever. However, they are looking for products that are carefully tailored to their needs and fit their budgets. Product design may be the key to unlocking this demand and serving it profitably, but a broader strategic rethink of the market may open up further opportunities. In other words, though the time for action is now, LTC insurers should keep a long-term horizon in mind in planning for future growth.