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Big Shifts Continue in the Long-Term Care Insurance Marketplace

Posted by Michael Kitces on Saturday, November 13th, 2:51 pm, 2010 in Insurance

Citing an array of classic problems - including interest rates, morbidity, mortality, and persistency - long-term care and general insurance behemoth MetLife announced this week that it will be leaving the long-term care marketplace completely. And coming on the heels of recent announcements last month by GenWorth and John Hancock of significant premium increases on large blocks of their policies, it would seem that the long-term care insurance marketplace is in a bit of turmoil. Does this mean the industry is in trouble, or is this actually a sign of stabilization?

Ron Lieber at the New York Times has a good summary of the recent MetLife announcement. The company will stop writing new policies on December 30th, including individual and group policies. In addition, the company may also be raising premiums by as much as 44% on some existing policies - a sharp increase, but not entirely inconsistent with comparable premium increases announced last month by GenWorth (18% rate increase affecting approximately 26% of policyholders) and John Hancock (40% rate increase) that will likely take effect sometime in 2011.

So what's going on? For many of these companies, this is not the first time they have sought to raise costs - there were also premium increases back in 2008 - and these are generally viewed as some of the biggest, strongest, sturdiest insurers in the long-term care marketplace. If even the "mighty" John Hancock and GenWorth have to raise premiums, and MetLife thinks it is so bad they don't want to even be in the LTC business, is the long-term care marketplace in trouble?

Ironically, I think many of the recent premium increases ultimately are not a sign of trouble in the LTC industry, but actually a sign of stabilization. In means, in essence, that the insurance companies are finally getting enough claims experience to get a good understanding of what kinds of risk exposure they actually have. The bad news is that they're realizing their original pricing when many policies were issued in the early years was flat out wrong - the companies underpriced. The good news is that by raising premiums, the companies are actually shifting to a point where they can be better relied upon to pay the claims that their policholders expect. And as the Wall Street Journal article about the MetLife exit points out, there have been numerous major companies in recent years that have shut their doors to the LTC business, including Allianz and Minnesota Life.

I realize that most clients (and many financial planners) despise premium increases, but I think it's important to view them in the proper context. LTC premium increases are akin to the cable company coming to you one day and saying:

"Our apologies. We just discovered an error in our billing. It turns out that although you currently receive the 187 premium channel cable service, we have actually been billing you for the 114 channel basic service. Having discovered our error, we unfortunately need to raise your rates to charge you for the 187 premium channel service you are actually receiving. Alternatively, if you wish, you can drop your service down to the 114 channel basic service that you have actually been paying for all along, and we'll continue to charge you the same amount. Either way, though, we will not charge you anything for all the years we accidentally gave you the premium service for the basic cost."

Of course, no one likes to get the bad news - whether it's that you're now going to be charged more for your cable channels, or your long-term care insurance - even if the announcement is simply to rectify a prior billing mistake, without charging you for the years of underbilling errors. But in the end, I wouldn't have it any other way. After all, as unpleasant as a premium increase can be, it's far better than the alternative - that the company continues to undercharge, even after discovering its mistake, until it is eventually unable to pay claims due to insufficient premiums and becomes insolvent, which would be a true disaster for everyone. Indirectly, raising premiums now basically means you've been getting especially good value over the past several years! 

It's also worth noting that premium increases are not necessarily a Machiavellian exercise. Granted, some insurance companies probably priced a little low early on, trying to compete for business, and justified it by being generous with their low persistency estimates (i.e., the companies were counting on being slightly more profitable because they assumed more people would buy policies, pay for a few years, and then cancel them before even making a claim; in reality, LTC companies have discovered that "virtually" everyone keeps their LTC coverage once purchased!). But many of the changes that have forced premiums higher were reasonably unexpected; people are having claims for much longer periods of time than any LTC research at the time these policies were issued would have suggested, especially with the introduction of extended periods of care at home or in assisted-living facilities. And when the core model of insurance companies is to collect premiums and invest them to generate growth to help pay for future claims, today's low interest rates are almost certainly an unexpected surprise to the actuaries making even conservative growth estimates in the 1990s and early part of the 2000s. 

On the other hand, the fact that MetLife is not just raising premiums, but is exiting the marketplace entirely, is a bit more concerning. It essentially means that they don't think they can effectively offer long-term care insurance coverage at any price. And it's not because they are too small to get a reasonable chunk of business; MetLife was already one of the largest players in the LTC marketplace, with a rather broad base of policyholders to diversify their risk. On the other hand, their departure means even more market share for the few major companies still in place, who in turn can spread costs amongst even more policyholders, stabilizing their risks even further. Clearly, one of the early challenges for many companies in the LTC marketplace was, in essence, too many companies chasing too few potential customers; although in some industries that can support competitive pricing, in the LTC marketplace it means that many companies didn't have enough policyholders to sufficient diversify their risk and let the "law of large numbers" do what it is supposed to.

So the bottom line is that I'm still encouraged by long-term care insurance in the marketplace, and by the policies that are still available. Yes, they're expensive - but so is the risk they are designed to insure. In the long run though, getting premiums to the right level and consolidation in insurers (i.e., insurers leaving and/or being merged into other companies, as has occurred through much of the decade) should help to further stabilize the LTC insurance marketplace. 

But do make sure you're really working with a stable company that has sufficient financial strength to weather the challenges that may still lie ahead. When you're buying long-term care insurance is not the time to stretch a little bit on the financial strength of the insurance company to get the best deal; as we've seen, companies
can ultimately raise premiums anyway if they are so low it's threatening the health of the insurer, and in the end being certain that claims are really able to be paid when needed is more important than anything else!

So what do you think? Are you doing a lot of long-term care insurance recommendations for your clients? Have your recommendations changed in recent years as the LTC marketplace has consolidated and premiums have generally risen? Or does that just reinforce the value that LTC coverage can provide?

  • VG

    Two thoughts. First, Hancock and Genworth have been selling on the fact that they have more claims paid than most insurers have taken in in combined premium – so the “finally have enough claims experience” seems a bit shallow. Second, I wonder if this industry will just end up being a subset of the overall runaway costs in the health care industry – no matter what we do, we end up with costs that nobody can possibly begin to imagine – with coverage today that is 1/4th the level at 4x the cost of what it was only 10 or 15 years ago. It makes one wonder whether paying LTC premiums for 30 years will provide substantial benefits, or be more an exercise in throwing good money after bad? I think I’ll take that walk-about after all.

  • Wit

    Your suggestion that the under billed cable TV charge is forgiven in not accurate in this insurance matter. The new (increased) rates will include charging for the under collection for the prior periods, OR they will not have enough premiums to pay the now anticipated higher level of claims. The continuing policyholder will have to make up the shortfall with higher premiums

    • Michael Kitces

      With all due respect, your statement is generally not correct.

      Prior undercharges for the coverage have generally already been absorbed as losses by the insurer, and the state insurance department will not allow the insurer to raise premiums to recover PRIOR losses. Premium increases are generally only to the point necessary to make the coverage sustainable from the current point forward, while the insurer absorbs prior losses or prior unexpected commitments to bolster reserves. If the insurer had not made the required contributions to reserve for prior periods where premiums were insufficient, the insurance company would already be taken over by regulators and placed into conservatorship.

      It’s also worth noting that in practice, because some policyholders do reduce or lapse coverage in response to a rate increase, the total impact of a premium increase is often mitigated by some reduction in risk exposure for the insurer.

      – Michael

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Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

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