—March 30, 2012
Prudential is the latest big-name carrier to announce it is ceasing sales of individual long-term care insurance (LTCi). The list of carriers who have left the LTC market is becoming quite long and distinguished: Prudential, Allianz, Unum and MetLife. John Hancock hasn’t dropped the product, but has been forced to implement massive rate increase of 40% in 2011 and a whopping 90% this month!
With demand for the product at an all-time high, you might wonder what the heck is going on in the Long-Term Care insurance industry. Really there are three factors converging to put pressure on the carriers.
1. Low Interest Rates
A significant portion of the reserves that carriers rely on to cover claims comes from investment returns. Most companies priced their products with an assumption of a 4% - 6% return on investment, but record low interest rates have made those numbers nearly impossible to achieve. For every 0.5% drop in investment return, insurers have to increase premiums by about 15% to stay profitable.
“If we were in a high interest rate environment, you wouldn’t see any of them leaving the industry,” said Jesse Slome, executive director of the American Association for Long-Term Care Insurance (AALTCi). On March 13th, the Federal Open Market Committee stated that interest rates are likely to stay low at least through late 2014.
2. Claims History
Older blocks of business, which were priced much lower but included richer benefits, are now resulting in more claims than anticipated. This is due to several factors: people are holding onto their policies longer than originally anticipated, the cost of care has risen faster than expected and more people are receiving care. Bottom line: people are simply using their policies more than the carriers anticipated when they sold them.
“People are holding on to their policies longer than companies expected and companies did not anticipate interest rates would be this low when they priced their older products," said Carl Austin, assistant vice president at A.M. Best Co.
3. State Regulations
Many states have regulations in place that limit a carrier’s ability to raise premiums. Essentially, the rate stabilization regulations that a number of states have put in place to protect consumers from unexpected premium increases have made it very difficult for insurers to recover from under-pricing mistakes.
Who’s Left Standing and Why?
Three major players in the LTCi market seem to be standing strong: Mutual of Omaha, Genworth, and MedAmerica. We’ve represented these carriers for a number of years and several factors seem to set them apart from other carriers:
Pricing – In the early years these carriers maybe weren’t known as the cheapest. So now, while other carriers are struggling with blocks of business that were underpriced, it seems these carriers had priced their products more accurately.
Underwriting – These carriers are known for prudent underwriting. Genworth was the first carrier to utilize a BMI chart and stop accepting applicants with Type I diabetes.
Claims – These carriers have been in the market a long time so they have decades of claims and underwriting data to help inform their pricing.
Investments – These carriers were conservative in their investment return assumptions, so the low returns in today’s environment have had less impact.
Commitment – All three of these carriers have recently issued statements reiterating their commitment to the long-term care market.
Products – All three of these carriers have competitive products on the market right now, helping them bring in premium dollars today.
- Mutual of Omaha – Mutual Care Plus
- Genworth – Privileged Flex Choice
- MedAmerica – Simplicity ii, Transitions Short-Term Care
It’s important to understand the underlying reasons behind carrier exits and not simply assume the product is going away. The number of Americans age 65 and older may more than double to 71 million by 2030, and about 70% of those people will require some form of long-term care, according to a 2010 industry research report by Prudential. The need for long-term care insurance and the opportunity for those who fulfill that need will only continue to grow.
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- jack hadley
Good information on the major ltci carriers and why they are staying put in the marketplace. If we as agents could encourage more of our younger clients to obtain ltci plans this would have a dramatic impact on keeping rates stable. this should provide insurers with more investments dollars and fewer claims associated with older ages.(i am a senior). thanks for the easy to understand comments on ltci.
- April 4, 2012, 2:50 PM
- David Hedges
Excellent article! Thanks for the timely info.
- April 5, 2012, 8:44 AM