The long-term care insurance marketplace has struggled tremendously over the past decade, as premiums have risen on both existing and new policies, and companies have become increasingly more stringent in their underwriting process. Over the past two years, however, the pace of change has accelerated, as major players like Prudential and MetLife have stopped offering long-term care insurance entirely. And with the low interest rate environment continuing to persist, a new round of changes is underway, with industry leader Genworth announcing the elimination of both so-called "limited pay" options (10-pay and pay-to-65 policies), and also declaring that it will no longer offer unlimited (i.e., "lifetime") benefits on policies anymore. In point of fact, while Genworth has not been the first or only company to make these changes, it’s notable when even the top carrier feels the need to cut back on its exposure to long-term care insurance policies. Ultimately, this is probably not the beginning of the end for long-term care insurance, but it’s also not clear if or when clients in the future will ever be able to get policies as "generous" as those offered in the past.
The inspiration for today’s blog post is the recent bombshell announcement by Genworth, the biggest carrier offering long-term care insurance (with a market share of approximately 40% of all new long-term care insurance!), that it will be dramatically scaling back its available product options at the end of July. The changes include the elimination of the unlimited benefit period, suspension of the 10-pay and pay-to-65 limited payment options, elimination of the 10% preferred health discount, and a reduction to the spousal discount (from 40% to 20%). Underwriting requirements for certain health conditions is also becoming more restricting.
The new pricing, underwriting, and other changes will take effective for all long-term care insurance applications signed after July 29th.
Tumult Continues in the Long-Term Care Insurance Marketplace
While Genworth’s announcement has made waves because it is the biggest long-term care insurance carrier, they are hardly alone in their changes. In point of fact, John Hancock and Mass Mutual have already ceased to offer unlimited benefit periods, and Transamerica just announced on the heels of the Genworth statement that they, too, will be reducing discount, suspending limited pay options, and eliminating the unlimited benefit period.
And of course, just a few months ago Prudential announced that they were leaving the individual long-term care insurance marketplace altogether, after Unum announced they were exiting the business a month earlier. Although in reality, as discussed on this blog back in 2010, MetLife kicked off the trend when they ceased writing any new long-term care insurance – a dramatic reversal, given that MetLife was not only a major carrier, but actually one of the primary underwriters of the Federal government’s long-term care insurance offering! Viewed in this context, it’s arguably fortunate that some companies are still willing to write long-term care insurance (LTCI) at all!
In turn, most long-term care insurance companies have now raised premiums on at least some block of prior policies as well, which is permissible given LTCI’s "guaranteed renewable" treatment, as long as it’s done on an entire segment of policies and is approved by the state insurance commissioner.
Accordingly, LTCI seems to be under assault from all directions at once – rising premiums on new policies, rising premiums on older policies, fewer carriers willing to write LTCI at all, and those who are still offering coverage are only willing to offer far more limited benefits (i.e., the elimination of unlimited benefit periods).
What’s The Problem With The Long-Term Care Insurance Companies?
Given the dramatic shifts underway in the LTCI marketplace, it raises the question: what’s the big problem? Did the insurance companies really misjudge that badly how sick people were going to get and how much long-term care they would need?
In point of fact, it turns out that the actual claims experience for insured individuals in need of long-term care insurance has actually not been the biggest problem (although clearly in retrospect some companies were a bit too optimistic regarding likely claims patterns, and/or were too lax in their underwriting). Instead, the biggest challenges for the long-term care insurance industry have been "surprisingly" low lapse rates, and a very problematic low interest rate environment.
Low lapse rates are problematic because a fundamental part of pricing insurance is anticipating how many people will decide not to renew their policy and let it go without a claim. For instance, if the lapse rate is 5% (typically in many other lines of insurance), then after 10 years, nearly 40% of policies are expected to have lapsed from non-renewal alone (in addition to those no longer in force due to death of the insured). Instead, however, lapse rates for many insurance companies on their LTCI policies have been less than 1%; as a result, instead of cumulatively lapsing 40% over the past decade, fewer than 10% of policies haven’t been renewed, and the insurance company still has far more exposure than originally anticipated.
The low lapse rates are further complicated by the current low interest rate environment. After all, insurance "works" because the insurance company takes in premiums, invests them for a (conservative) return, and then uses the accumulated premiums plus growth to pay future benefits. When interest rates fall from 5% to 1%, though, the 80% relative decrease in income results in far less money accumulated – especially when compounded over many years. In point of fact, this alone explains the bulk of premium increases on existing policies in recent years; the insurance companies simply don’t have as much money as they expected to pay out current benefits, because the ongoing premiums have not been able to grow nearly as much as anticipated. And because the lapse rates have been so low, the insurance companies find themselves earning not only unexpectedly low and insufficient returns, but facing claims on a much larger number of policies.
Cutting Back On New Policies
Given the realization that both lapse rates and interest rates are as low as they currently are, insurance companies issuing LTCI have not only raised premiums on prior policies where absolutely necessary, but have also significantly raised premiums on new policies as well. The cost to buy a policy in today’s marketplace is for some policies 50% – 100% more than an equivalent policy would have cost 10 years ago for someone at the same age; that’s simply the reality of trying to buy low-lapse insurance in the midst of such a low interest rate environment.
Unfortunately, though, even this has not been the only constraint on LTCI carriers. The other factor that remains is that most insurance companies that issue long-term care insurance do so as a part of a larger company that issues many different types and lines of insurance. As a result, the companies must also manage their overall business as a business – which includes managing for both the profits of their various lines of insurance, and the insurance risks to which they are exposed.
Accordingly, many of the insurance companies are making adjustments to manage the profits and risks of their insurance exposure. In this context, the decision of many companies to raise premiums on new policies – as well as eliminate discounts – represents a goal of improving the profitability of the insurance (and/or giving more of a margin for error in the future). Companies that have dropped offering LTCI entirely are the ones that have decided the risk/return opportunity is just not worthwhile. Elimination of limited pay options is a way to ensure that, if ultimately necessary, the company can raise premiums on all future policyholders (because they’ll all still be paying premiums as long as they keep their policies).
And for all the companies that have made their policies less desirable, to some extent it can actually represent a deliberate attempt to have consumers buy fewer policies. By analogy, think of the insurance company’s lines of business like a portfolio: if risky equities (or LTCI policies) become too large a portion of the overall portfolio, you stop allocating as many of your new dollars to that investment, shifting instead to other investments (or lines of business).
Unfortunately, though, the reality seems to be that all of the insurance companies are seeking to reduce their LTCI exposure at the same time, and in fact appear to be impacting one another. When some companies began to eliminate limited pay options or unlimited benefit pools, the result was a competitive advantage for companies that were still offering the policies. Except those companies quickly began to get more business than they wanted, ultimately leading the companies to response by cutting their own offerings to manage their own risk exposure.
The Bottom Line
The bottom line is that the ongoing developments in the long-term care insurance marketplace don’t necessarily indicate that the insurance companies are broken, failing, or that long-term care insurance isn’t viable. It does indicate, though, that the companies are struggling to generate reasonable profits in the low interest rate environment, and at the same time are concerned that it’s not necessarily good to be "too good" of a deal in today’s marketplace, or the company risks taking on more exposure than they necessarily intend.
The changes are a sign, though, that some of the generous benefits of the past may be gone for the foreseeable future. Until and unless the interest rate environment improves substantially, limited pay policy options may not return, and it’s not entirely clear whether unlimited benefit pools will be back in the foreseeable future, either. On the other hand, it’s worth noting that because unlimited benefit pools have always been expensive, some clients should probably be going for the "short-fat" approach to LTCI anyway, given a limited budget.
In the meantime, if you had any clients that were still considering buying LTCI coverage with some of the features that Genworth is eliminating… you have until July 29th to submit the application!
So what do you think? Do you still consider long-term care insurance to be viable for clients? How have you handled prior or current premium increases? Are you concerned about the outlook to the marketplace? What are you communicating to clients?