Demographic shifts during the last few decades have changed the nature of long-term care insurance (LTCI) market demands. An aging population and the decline of defined benefits plans and traditional sources of retirement income have led to greater recognition of the need for “self-reliance.”
More consumers now feel an acute need to take action to protect their own financial assets as they head into their retirement years. New medical treatments and drugs mean that retirement time horizons today often extend for several decades, significantly longer than in the past. The result of this extended longevity is that more people will live to ages where the likelihood of suffering a serious health care event is high, much higher than their risk of being disabled during their working years.
Today’s LTCI product designs don’t reflect longevity needs, advancements in health care technology or current trends in retirement planning. Many companies continue to market products quite similar to those they sold 20 years ago. Yes, prices are significantly higher, but benefit and funding mechanisms are largely the same.
Despite the increasing demand for LTCI coverage, products have not kept pace with the evolving needs of everyday consumers, younger buyers in particular. Thus, insurers have yet to take full advantage of a significant growth opportunity.
So how can carriers reverse the situation? Here are four steps proactive insurers can undertake to revitalize the LTC planning marketplace.
1. Understand lessons from the past.
First and foremost, LTC insurers must reflect on their past if they are to shape a better market in the future. Specifically, insurers must understand past missteps and how they have shaped today’s market. Most important, they need to think about how to create value for their future customers, while minimizing the possibility of repeating history.
Key learnings could come from:
The haphazard addition of benefits in order to increase marketability without considering long-term costs
The assumption that underwriting adjustments would provide wider morbidity savings
The neglect of day-two initiatives, such as claims operations, that lead to claim leakage and poor process performance
The precedent of front-loaded, heaped commissions
The precedent of fixed, and level, premium payments
We believe individual insurers should not shy away from challenging the status quo and should avoid treading too carefully as they seek new innovations in funding mechanisms and product design. After all, LTC insurers did get many things right, such as the promotion of home health care models and linking benefits to the Consumer Price Index.
The bottom line is that insurers can — and should — apply the valuable lessons from recent history as they design offerings for an evolving market.
2. Apply simplicity, affordability and value considerations in the product design process.
To foster growth, LTCI policies should be simple enough for a wide cross-section of consumers to understand the value of the products being offered. Legacy products have traditionally scared away consumers due to their high cost and their “use it or lose it” nature.
In truth, LTCI is not like any other insurance product. It lacks familiar features, such as deductibles, and instead consumers must select from a range of unfamiliar options, including benefit levels, benefit periods, elimination periods and inflation rates, when they purchase their policies. Simpler designs can make it easier for applicants to navigate this complexity, and thus reduce the risk that they will fall out of the sales funnel when faced with too many questions.
So-called catastrophic LTCI products are one way to clarify the value proposition to consumers. Large, early benefits that protect against accidents and claims and that preserve 401(k) balances would help consumers get past the lingering concern that their premiums may never yield any benefits.
These policies should be priced to meet the needs of middle-market consumers, while protecting them from financial ruin. Additionally, the cost of providing such catastrophic benefits could be reduced through the addition of an early duration deductible that vanishes over time.
Ultimately, tailoring products that meet the needs of today’s targeted demographics, rather than the overly complex and unfamiliar approach that is prevalent today, would greatly help to make these products more attractive and possibly more valuable to today’s consumer.
3. Adopt flexible funding mechanisms.
Several insurers are weighing multiple variables when determining the best way to structure LTCI premiums. For instance, forward-looking carriers are assessing the benefits of a temporary premium reprieve, or “premium holiday,” for policyholders facing financial hardships (such as job loss or medical costs). There is widespread consensus that a significant portion of lapsed policies result from such situations.
Similarly, some insurers are exploring the viability of employing an adjustable benefit and premium structure across the different stages of a policyowner’s life cycle. Consumers may appreciate an LTCI product with such flexibility. Of course, this would come with certain underwriting constraints and possibly upper bounds on the benefits, but it would allow policyholders to retain their policy even in adverse times without having to prove financial hardship. In the long run, this type of LTCI product may help customers retain their policies, which is good for everyone.
Premium reprieve and benefit flexibility could demonstrate the industry’s understanding of and sensitivity to consumers’ real-world needs — and insight about where LTC insurance fits in the hierarchy of those needs. After all, in the face of immediate-term health care costs, LTC insurance may seem like a luxury. Ultimately, offering such flexible funding mechanisms may not decrease the profitability of LTCI products, but may increase marketability.
4. Embrace predictive analytics to provide value
We believe the LTCI industry should follow the lead of the health insurance industry’s increasing focus on wellness, which incorporates such initiatives as required check-ups for prenatal care and the use of wearable technology to offer premium discounts on group policies. By creating relationships with consumers in a more positive, value-added way, the industry could help reduce claims costs and possibly lower premiums.
For instance, predictive analytics can help LTC insurers identify policyholders who have the highest propensity to suffer injury from a fall – an event that is expected to cost the health care system $55 billion by 2020. With this knowledge, an insurer may be more willing to proactively work with its policyholders to prevent such an event, perhaps even paying to fall-proof the home.
Similar approaches can be used to protect against dangerous combinations of medications, and help families determine the right time for their family members to use ride services, rather than driving.
The bottom line
There are clear reasons why the LTCI marketplace should be a growth engine for insurers, especially well-established and financially stable carriers. 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.
Of all the options available (self-insurance, reverse mortgages, family provided care), properly designed LTC insurance may be the best way to address these concerns. Insurers need to make the necessary adjustments to their products and processes to convert this potential into reality and, more important, position themselves for a successful and sustained return to the marketplace.