made to understand these risks and the challenges of generating
an adequate LTCI benefit decades in advance. We believe a more
manageable relationship between premiums and benefits should
supersede concerns about the potential shrinkage of the variable
benefit itself. The lower total cost of variable LTCI over the long
term due to the elimination of large margins required by conventional LTCI will bring satisfaction.
However, for variable LTCI to succeed, the importance of education cannot be overstated. Understanding and accepting the
variability of LTC benefit payouts will require the policyholder to
understand, first, the many factors that can affect LTC insurance
benefit outcomes; second, that insurers set higher margins when they
cannot anticipate every contingency affecting risk; and third, that
guarantees, however desirable in themselves, carry additional costs
that may not result in good purchase value. Variable LTCI accords
well with the notion that insurance serves consumers best not where
every last dollar of claim is paid but where major risks are covered
at the best possible price. That philosophy, held by money-smart
consumers of other insurance products, must be encouraged among
LTCI consumers so that they purchase coverage adequate to their
needs and are not over-insured.
Once the principles of variable LTCI are established, serious
explanations of plan designs, benefits, and triggers that can reduce
benefits and other subjects can be introduced to prospective buyers.
If there is a financial adviser or agent, close consultation would
alleviate misgivings or incorrect conclusions. If the policy is sold
direct or via a group sponsorship, it will be necessary to harness
the full resources of internet technology, including online modeling
tools, webinars, video programs, graphs, and other aids, as well as
well-trained customer service representatives. An introductory
education and awareness campaign would probably take up to six
months and involve post-enrollment support and reinforcement.
We believe periodic communications to policyholders would be
required to report the status (current value) of benefits and any
changes, as well as voluntary buy-ups in the event of benefit reductions. Only if these conditions are met can variable LTCI become
both comprehensible and attractive.
Clearly, variable LTCI is not a perfect solution for everyone. As
acknowledged, it introduces an element of uncertainty not found,
or least expected, in conventional LTCI. For some consumers, being
unable to rely on a certain fixed amount of benefit could affect their
overall sense of financial security. But at the same time, uncertainty
exists today around the total benefit payout for traditional standalone
LTC insurance due to rate increases and the benefit reductions many
policyholders make when faced with them. With variable LTCI all
of the terms are on the table in advance, requiring far less in the
way of ad hoc planning and communications support.
For insurers, variable LTCI may be better able to align short-term cash flows with long-dated liabilities by reducing the amount
of projected capital risk. As such, variable LTCI could become a
welcome addition to an insurer’s product portfolio. Like solar energy
and the electric car, variable LTCI seems impractical … until it is
recognized as advantageous and even necessary. It is indeed an idea
whose time has come.
PAUL E. FORTE, Ph.D., is chief executive officer of Long Term
Care Partners, LLC. ROGER D. LOOMIS, MAAA, FSA, is a
principal at Actuarial Resources Corporation.
The opinions and positions voiced in this paper are our own and do not
represent Long Term Care Partners or its parent company, John Hancock
Life Insurance Company (U.S.A.) and subsidiaries; Actuarial Resources
Corporation; or any governmental or regulatory agency. We alone are
responsible for any errors or misjudgments this paper may contain.
[ 1] A number of articles detail developments in the LTCI market.
For a recent consumer perspective, see Howard Gleckman,
“Where Is the Long-Term Care Insurance Industry Headed?”;
Forbes, March 21, 2016; and Leslie Scism, “Collapse of Long
Term Care Insurer Reflects Deep Industry Woes”; Wall Street
Journal; Dec. 5, 2016. For a general overview of how the current
crisis developed and possible fixes, see Richard Frank, Marc
Cohen, and Neale Mahoney, “Making Progress: Expanding Risk
Protection for Long-Term Services and Supports through Private
Long-Term Care Insurance”; SCAN Foundation; March 2013. For
a timeline of key private LTCI market developments, see Paul
Forte, “Private Long-Term Care Insurance, Past, Present, and
Future”; Contingencies; May/June 2015; p. 18–27.
[ 2] State insurance departments compounded the problem by
insisting that initially LTCI margins be relatively thin, with the
lion’s share of premium going into paying claims. Such slender
margins were not adequate to withstand changes in actuarial
assumptions necessitated when emerging experience brought
lower-than-expected lapse rates, lower-than-expected interest
rates, and improving mortality. The introduction of the National
Association of Insurance Commissioners (NAIC) Model Act and
Regulation in 2000 stipulated the use of stabilizing margins for
“moderately adverse” experience in new policy issues, but by
then it had become apparent that premiums for early-issued
policies had been understated. Meanwhile, consumers began to
plan their budgets around that initial level premium. Indeed,
many had the impression that premiums were locked in for the
duration of their life.
[ 3] This design would require a change in regulations. See Howard
Gleckman, “Genworth Stays in Long-Term Care Insurance, But
Seeks a New Premium Design”; Forbes; Dec. 4, 2013.
[ 4] See, for example, Allison Bell, “ 5 Reasons Variable Annuities
Look Prettier”; ThinkAdvisor; Nov. 7, 2017; which postulates that
a better understanding of risk, new product design, and U.S.
stock price improvements may have helped to boost sales in
today’s investment market.
[ 5] It should be noted that by “variable” we do not mean that
policyholders would be able to choose the nature of the
investment backing their policies, as with variable life and
annuities. That could come later, once the concept is well
understood and tested, but it is not something we recommend
upon introduction. Here we define variable as having solely to do
with the varying amount of minimum daily benefit, maximum
lifetime benefit, or both.
[ 6] “Claim costs” can be thought of as a schedule of net premiums
for an annually renewable term policy. To say, for example, that
claim costs increase from $5 a year to $9,000 a year from attained
age 55 to age 90 means that in theory this policy could be offered
without any prefunding for premiums in those amounts (plus
margin, expenses, commission, and profit).
[ 7] As insurers know, it generally takes years for a premium increase
to be approved (assuming it is approved) and implemented. By
this time, the deficit may grow due to compounding.
[ 8] The only divergence is when adjustments are made to promote
intergenerational equity as discussed in Figure 2; even then, the
adjustments naturally reverse themselves if they prove to be too