Since the summer, the industry has suffered a steady drip of bad-but-not-unexpected news relating to the long-term care industry, as soaring payouts on old policies have forced a raft of big insurers to boost their reserves to the tune of billions.
The announcements have rung out like a sort of death knell for the old long-term care market, which seems to be reaching the end of the road. The policies that were once so widespread as a means of providing care in old age are now a thorn in the side of insurers, and any commercial opportunity they once presented has long faded.
The shift has little to do with any fall in demand for long-term care — quite the opposite. Part of the ‘problem’ is that so many Americans now live to such a ripe old age – meaning a far greater need for more expensive long-term care. Half of adult Americans now suffer from chronic illness, and healthcare costs for assisted living have almost doubled over the last decade and a half.
(Related: Life-LTC Hybrid Sales Soar: LIMRA)
As a result the market is having to significantly review outdated assumptions made long ago when the first traditional long-term care policies were written, during an era when interest rates and projected lapse rates were far higher, and health care expenses far lower.
The old equations simply don’t add up to anything commercially viable anymore. Rocketing premiums have hollowed the market out. Many producers have withdrawn altogether, and those that remain are left with very few arrows in their quiver.
But while these traditional policies no longer make any sense from a risk perspective, neither does axing an entire revenue stream when the fundamental demand is still there, especially considering it was once so profitable.
The New Strategy
Enter hybrid policies. These newer products work by combining life insurance and long-term care insurance into a single framework. They give the customer the benefit of both death and long-term care protection, by giving the option of accelerated payments of a death benefit if needed. And on the other side, the producer benefits from a far more stable risk profile that creates a sustainable means of growing both the top and bottom line.
Designed to make long-term care insurance profitable again, the policies are becoming increasingly popular among carriers, with 260,000 sold last year. Customers have responded very well to the inherent flexibility the product affords, in having an option that isn’t “use it or lose it” with regards to benefits. Hybrids provide a death benefit even if the LTC benefit isn’t used, and they additionally provide a convenient means for individuals to protect their accumulated financial assets from the cost of late-life care — offering significant ease of mind.
There are many good underlying reasons, from a risk perspective, to combine the two lines. The fact that it has taken so long for such an innovation to come about is largely a circumstantial artefact of the financial crisis. The aftermath saw carriers rush to de-risk their portfolios, with long-term health care policies being among the first for the axe, and product innovation became a low priority.
Addressing Producers’ Concerns
Now though, there is still a significant culture barrier to overcome with regards to their wholesale take-up.
Producers — very understandably — still view this area with a great deal of caution, having been burnt so badly, with the consequences of earlier miscalculations continuing to hit headlines and profits alike.
This skepticism is not entirely an irrational hangover. The current wave of payouts is a visceral reminder of how difficult it can be to properly design assumptions around health care and life expectancy in an ever-changing world —and how severe the consequences of error are. The concept behind hybrid policies is sound, but if they are to truly lead a renaissance of the long-term care insurance market, carriers will want (and need) to ensure the mistakes of history are not repeated.
This means taking a far more sophisticated and engineered approach compared with that which went into the models of old.
Long-term robustness has to take priority. This means working with experts to ensure the design is right and well-founded, which requires a specific set of underwriting skills, a granular understanding of the pricing and risk-modelling involved, and deep expertise when it comes to mortality rates along with new reinsurance structures that support risk transfer.
The failures of the early aviation industry — and its subsequent revival — provide a valuable lesson in the importance of hyper-engineering in a product where the slightest failure can do great damage.
In this sense, the long-term care insurance market isn’t so different,
Hybrid policies can certainly fly, but quality will be the crucial factor that gets them off the ground and back into the air. For those that can get there first, the rewards will be significant.
Tony Laudato, FSA, MAAA, is vice president, partnership solutions, at the Hannover Re Group. He works with life insurance carriers and with distributors.