hit fixed investment targets, as bond yields reached near-record
lows, while rising claims and premium waiver for those on claim
reduced cash flows. Not surprisingly, stand-alone sales slumped,
although some insurers posted fairly strong numbers in the mid-
2000s, while the FLTCIP posted some excellent results in 2011
for its second Open Season.
Fast-forward to the present. As of the end of 2013, about
7. 4 million persons held private LTCI of some sort, roughly 80
percent through individual policies and 20 percent via group
coverage. These policies generated about $12 billion in earned
premium. Sales dwindled to just over $400 million annualized,
and the downward trend appears to have continued into late
2014, at least in the individual/retail market.
According to Broker World, only 16 insurers are currently
offering stand-alone LTCI policies, with more than 25 such insurers having exited since 2008.8
Sales volumes have been unofficially capped and marketing
support has been cut back. Claims, on the other hand, have continued to rise. In 2012, $6.6 billion in LTC insurance claims was
paid to over 264,000 claimants.
Two insurers each now pay out in excess of $1 billion
The disposition among insurers is sober. Independent rating
agencies and stock analysts remain skeptical, if not sour. The
plaintiff bar has discovered LTCI, with the number of lawsuits
filed against insurers up sharply in recent years.
Those insurers not wishing to exit the market have begun to
reposition themselves. The unmistakable trend is one of de-risking, with insurers now offering thinner benefits at fatter prices.
Take, for example, underwriting. While insurers still aim to
accept persons whose health is typical for their age, they are
requiring more hard evidence of good health. Age ranges are
more restricted, attending physician’s statements are being required on all fully underwritten applications, more testing is
stipulated in the form of laboratory work, pharmacy screens are
being utilized, and more pre-existing conditions are being found
uninsurable, with co-morbid scenarios resulting in limited coverage or declines.
Recently, several major insurers have changed from unisex to
gender-specific rates, citing evidence that females do live longer
and use more long-term care than males.
The same de-risking logic is being applied to plan design.
Unlimited (lifetime) policy benefits are being pulled. Shorter
maximum plan durations of five to seven years are becoming the
norm, with three- and even two-year plans receiving emphasis.
Limited pay options, indemnity riders, return of premium, and
restoration of benefits have been suspended and in some cases
preferred health discounts discontinued. Cash benefits continue
to be offered by some insurers, but only as a rider. Guaranteed
renewability, which means that coverage cannot be canceled if
premiums are paid as scheduled, is a valuable consumer pro-
tection because the carrier cannot change provisions or cancel
coverage provided premiums continue to be paid. However,
guaranteed renewability doesn’t guarantee that premiums will
remain level in the future. State insurance departments can limit
the premium increases that insurers seek or block them altogeth-
er, but they also must help insurers remain solvent or themselves
face the consequences of carrier failure. Such consequences will
almost certainly include increased demand for taxpayer-financed
coverage, which is already at unsustainable levels.
Such is the LTCI market today. Coverage is trending toward
the more finite, and it is costlier. Actuaries are now more confident that pricing for their products is being corrected, and
marketing executives are more circumspect, positioning LTCI
not as a total financial solution, but as a limited tool, a valuable
adjunct to other financial resources. Whether such a value proposition will prove satisfactory to consumers or render private
LTCI untenable is anyone’s guess.
II. Actuarial Challenges
Lapses were the first important actuarial assumption that had
to be rethought. Early LTCI actuaries assumed lapse rates many
times greater than those of today’s assumptions. As Dawn Helwig
noted in a feature in the November/December 2014 issue of
Contingencies, premium rates based on initial lapse rates of 8 percent
and ultimate lapse rates of 5 percent were not uncommon in the
early 1990s. These assumptions were based on experience with
other health insurance products. These rates were subsequently
revised downward significantly, so that most LTCI actuaries are
using ultimate lapse rates of well under 1 percent. The change
in assumptions about how so few will terminate voluntarily resulted in dramatic restatements of the reserves needed to pay
claims and necessitated large rate increases.
Lapse assumptions were followed by concern about interest
rates. As noted above, LTCI liabilities are long-dated, often in
excess of 30 years, but assets are not, leaving insurers with limited options for investing. Most invest in bonds and other fixed
instruments. However, the inability to earn good rates of return
in the past decade has meant lower discount rates, especially
during and after the recent financial crisis, and again higher premiums. The difficulty in getting a good return on assets under
management has affected all LTCI pricing.
Those insurers not wishing to
exit the market have begun
to reposition themselves. The
unmistakable trend is one of de-
risking, with insurers now offering
thinner benefits at fatter prices.