As the long-term care insurance industry continues to suffer - a challenge that won't likely end soon, given ongoing increases in health care costs and continued low interest rates that may it difficult for the insurer to generate a return on premium investments - planners and clients have both become increasingly skeptical about long-term care insurance. At best, prospective policyowners feel compelled to buy far less coverage than they can afford, just to leave room in case premiums rise in the future, given the quantity of ugly premium increases on existing policies that have occurred in recent years. Yet the reality is that while many industry trends, from low lapse rates to low interest rates to claims patterns were a surprise relative to what insurance companies expected 10-15 years ago, they are known facts today. Accordingly, even the base cost for a new long-term care insurance policy has risen dramatically over the past decade. However, higher pricing - adjusted for the realities of today's marketplace - actually means that while the pace and severity of premium increases on old policies has risen, the risk of premium increases on new policies purchased today may actually be declining! Are planners and their clients becoming most concerned about long-term care insurance premiums at the time they are actually least likely to occur!?
Wednesday, October 24. 2012
The inspiration for today's blog post is a series of ongoing conversations I've been having recently with some fellow financial planners regarding the viability of long-term care insurance, and in particular about how to craft appropriate long-term care insurance recommendations in light of the industry's current track record for raising premiums. "I'm not even certain what's safe to recommend anymore," one colleague noted, "when companies can come back and raise premiums by 90% after the fact. How can you be certain the policy you recommend today will even be affordable in the future?"
"But is it really appropriate to assume 90% increases on new long-term care insurance policies from here?" I replied, "Or is the reality actually the opposite - that today's premiums are actually less likely to rise in the future?"
Rising Premiums On Existing Policies
In recent years, nearly every long-term care insurance company has had to raise premiums on at least some prior block of their insurance policies, especially those issued 10-15 years ago, when policies were priced for the far more favorable interest rates available at the time, and before the industry discovered how low lapse rates would be. Although most premium increases are "just" 10%-25%, some have been much more dramatic, most notably a 90% increase in premiums on some John Hancock policies in Illinois earlier this year.
Ultimately, insurers can only raise premiums with permission from the state insurance department, and each premium increase is approved based upon a specific group of policies - for instance, all policies issued in 2004 on those age 65-75 years old. The increase is generally only approved if it is deemed necessary and in the interests of policyholders - essentially, if the premium increase is necessary to ensure that the insurance company will remain viable and capable of paying out claims (after all, while a premium increase is undesirable, an insurance company being unable to pay claims at all is even more undesirable!). Unfortunately, though, because state insurance departments often want clear evidence of an extreme mismatch between premiums and claims before approving a premium increase, and may further delay premium increases in the hopes that current trends will reverse, when the increases do happen, they are often quite severe, as the earlier example noted.
The Real Reasons LTC Premiums Are Rising
Although the popular press has widely blamed rising long-term care insurance premiums on "unexpected" claims from long-term care insurance companies, the reality is that rising costs of long-term care itself has played only a limited role in premium increases.
The true drivers of premium increases - or more accurately, why older blocks of long-term care insurance policies are generating such losses as cumulative premiums exceed cumulative claims - is that long-term care insurance has had "surprisingly" low lapse rates, and it has been difficult for insurance companies to generate much investment return on their premiums collected in the current interest rate environment.
As discussed previously on this blog, early on insurance companies anticipated that long-term care insurance would be like most other types of insurance, where 5%+ of policyowners end out allowing their policies to voluntarily lapse (due to change of mind, change of circumstances, change of financial situation, etc.). However, in practice, the lapse rate has been more like 1% - 2%, which means insurers remain on the hook for far more of their late 1990s and early 2000s policies than they ever expected. As claims come in, they payouts are higher than expected, not simply because costs are higher, but because more people actually held their policies to claim than expected.
Similarly, as insurers expected 5%+ lapse rates and only got 1% - 2%, so too have insurers suffered as interest rates have dropped from 5%+ down to the 1% - 2% range. This has been a significant problem, given that the fundamental business model of insurance is to collect premiums, invest them, and use the aggregate premiums plus growth to pay out future claims. When growth is much lower than expected as interest rates fall (since most long-term care insurers invest in bonds), there simply isn't as much money available to cover claims down the road. Or viewed another way, when interest rates are low, insurers need to charge more up front, to make up for the reduced growth; except 10-15 years ago, insurers didn't know rates would be this low, so they failed to charge enough up front, and are now suffering because of it. Estimates from the American Association for Long Term Care Insurance (AALTCI) are that every 1% decrease in interest rates leads to a 10%-15% increase in required premiums!
Thus, as lapse rates continue to be low, and interest rates continue to be low, insurers find the pricing on their old policies to have an increasingly severe shortfall, leading the companies to go back to the state insurance departments to request a premium increase to ensure the financial strength and viability of the insurer.
Planning For Premium Increases Going Forward
As a result of all the premium increases, many planners and long-term care specialists caution clients not to purchase the maximum amount of coverage they can afford, leaving room for future premium increases that may occur in 10 years for today's newly issued policies, as it has occurred recently for those policies issue 10 years ago.
Yet the reality is that long-term care insurance is not intended to be priced for future premium increases; after all, insurance companies are generally only allowed by state insurance commissioners to raise premiums if they can demonstrate that they are losing significant money on the policies under their current pricing, such that it's in favor of consumers to increase premiums and price the policies appropriately (to ensure the company will be able to pay all promised benefits in the future). As a result, companies that raise premiums will almost certainly have been making little or no profit, or outright losing money on the policies, for many years before even being allowed to raise premiums (as John Hancock surely was on their policies that had a 90% premium increase!). To say the least, this is a rather poor pricing strategy for an ongoing business!
Accordingly, given all the difficulties that have been experienced, some suggest that in reality, the likelihood of future premium increases on today's policies is actually lower than at any point in history! After all, today's policies can be priced far more accurately, as the low interest rate environment is now known, and actuaries have far more information about lapse rates on long-term care insurance, not to mention the improved underwriting and better knowledge about claims patterns. In point of fact, that's why new policies today are far more expensive than comparable policies were 10 years ago - the increases have already been priced into new policies.
Of course, it's hard to say this provides any true surety against the risk of any premium increases in the future. Moody's was out just last month noting a continued difficult environment for long-term care insurers, especially as the extension of the Fed's quantitative easing program means return on investments isn't likely to be higher in the foreseeable future. At best, insurers can price the coverage appropriately but at rates that are so high, far fewer can afford the coverage in the first place.
Nonetheless, it does at least imply that any future pain for new policies issued today is likely to be far less severe than premium increases were for policies issued in the past. The time for premium increases was when prices were low, not after they've risen, not unlike how even though people were more excited about future price increases on tech stocks in 1999 than 1995, their odds of future price increases were actually declining rapidly by 1999 as the upfront price had risen so much!
So what do you think? Are you telling clients buying new long-term care insurance policies today to expect premium increases? Do you think the odds of premium increases are rising or falling? How do you plan for the potential for higher premiums in the future?
As the long-term care insurance industry continues its efforts to restore stability and regain profitability, the latest shoe is about to drop: a new gender-based pricing structure that will mean men and women pay different premiums based on their gender.
Tracked: Feb 20, 09:12
You are missing the point! Those of us in the know understand that LTC insurance has been going through growing pains. After all, our industry is young compared to other types of insurance. We had little actuarial knowledge of how to price this product in the beginning. We also know that marketing departments underpriced the product to grow market share.
The reality is that John Hancock had to make a decision to either ratchet up the increases over time as states would allow filing increases or do it in one fell swoop. The latter was determined and we saw some staggering increases on some blocks.
Have you ever spoke with a client when they call to complain about the increase? I have and guess what? In most cases they accepted the increase or took the lower inflation option for two very important reasons. #1 they understood why they bought the protection in the first place. To protect their family from the burden of caregiving and #2 they looked at what the cost of a new policy would be and realized it was double their premium even with the increase added. If you check with John Hancock you will see that very few policyholders cancelled their policy after the rate increase.
And here is my point, LTC insurance is the best leverage tool against the largest uninsured risk in retirement, because the features and benefits of a traditional policy are more customizable and beneficial to the client (with shared care, and 0-day elimination for home care just to name two). Advisors need to understand that clients are concerned about staying home, quality care, independence, staying in control, dignity, peace-of-mind, care coordination, and they don’t want to be a burden. LTC insurance is the best option to assure their wishes are fulfilled.
LTC is an emotional decision, no matter your net worth. My suggestion is to start talking with your clients in their 40’s and 50’s to save money on premium costs. 60’s and 70’s it’s too late most will not health qualify by then. If I can talk with a client about the cost of an LTC insurance versus their cell phone bill or cable bill and help them understand the nature of insurance is to buy it and hope you never need it (any kind of insurance) then the fear of rate increases will be rationalized.
I agree with you I believe the insurance companies have priced the products for the new economy and we will not see large increases again from the top 10 carriers.
I really don't understand your comment "Tisk tisk! You are missing the point!"
Everything you said here agrees entirely with what I have written here in this blog post and previously regarding long-term care insurance and premium increases, going back over 2 years. See, for instance, http://www.kitces.com/blog/archives/69-Big-Shifts-Continue-in-the-Long-Term-Care-Insurance-Marketplace.html
Why do you start your comment out by criticizing me and then agreeing with everything I've written? What am I missing here?
excerpt 1 "I'm not even certain what's safe to recommend anymore," one colleague noted, "when companies can come back and raise premiums by 90% after the fact. How can you be certain the policy you recommend today will even be affordable in the future?"
Really? This advisor should work with someone that believes in the product or stop writing applications because he is conveying the wrong message. The issue is to transfer the risk away from the portfolio, this is a better stragtegy than self insuring. The impact of a rate increase over time is much less than one or two years of care.
excerpt 2 "most notably a 90% increase in premiums on some John Hancock policies in Illinois earlier this year."
You mentioned 90% 3 times in this blog, you are scaring people from the only leveraging tool available today (linked benefit included).
excerpt 3 "Unfortunately, though, because state insurance departments often want clear evidence of an extreme mismatch between premiums and claims before approving a premium increase, and may further delay premium increases in the hopes that current trends will reverse, when the increases do happen, they are often quite severe, as the earlier example noted."
Hancock made the decision to dramatically raise rates because it would have been suicide to gradually increase. But now the rates are stable and with the new inflation riders (CPI & Benefit Builder) they have removed the risk out of their pricing strategy.
excerpt 4 "As a result of all the premium increases, many planners and long-term care specialists caution clients not to purchase the maximum amount of coverage they can afford, leaving room for future premium increases that may occur in 10 years for today's newly issued policies."
No we don't, because we believe in the product! We understand a large portion of our clients will need care, so we recommend buying as much protection as they can afford both today and in retirement. I use a general rule of 4 to 6% of their retirement income can be used to pay premiums.
excerpt 5 "At best, insurers can price the coverage appropriately but at rates that are so high, far fewer can afford the coverage in the first place.
The key is to buy in your 40's and 50's to keep the premiums lower, also we suggest buying something now and adding to it down the road if needed. Hancock has some great features to increase benefits if the need arises without underwriting.
Basically I'm trying to say that I believe in transferring the risk to an insurance company because (if properly designed) insurance will leverage the client's dollars better than the best designed portfolio. It allows the portfolio to perform as intended(retirement income)without invading principal or interest if liquity is required for care. I would gladly pay 20 to 30% more for my policy over the next 25 years for the peace-of-mind it gives me and my wife. I'm still waiting for my 30% loss over the last 4 years in my portfolio to come back.
I'm just curious, Do you know someone personally that has needed care? What impact did it have on you and the caregiver? Who controlled the health care decisions? Where was care delivered? Who paid for the care?
You're extracting excerpts from what I wrote, and saying nothing about what I wrote in response TO those excerpts!
Yes, I quoted an advisor who actually asked whether it's still safe to recommend LTC insurance, because it really IS a concern of advisors. The entire article answers this concern.
Similarly, I cited the 90% premium increase, because it is a fact. It happened. People know about it. It's concerning. Which, again, is why the article makes the point that such scenarios are NOT likely to repeat.
Similarly again, I noted that many recommend not to buy maximum coverage to leave room for rate increases, which you disagree with AND I DO TOO. Because, again, the entire point of the article is that premium increases are NOT likely to repeat anywhere near what happened in the past, if at all. Notwithstanding that, prices ARE higher, and the coverage IS less affordable because some people simply can't afford those rates; that is a fact, and even the AALTCI's own statistics make it clear that LTC insurance sales activity has declined as premiums rise, and that people are shifting their buying behavior to select more affordable coverage options (thus the rise of 3% inflation riders in lieu of 5% inflation riders for a significant volume of sales).
Throughout your comments, you are agreeing with everything I am stating, yet for some reason framing it as criticism, because you choose to quote the objections I cite and choose NOT to quote ANY of the responses I provide to those objections.
Nonetheless, I see no reason to ignore those concerns or pretend they're not there; that lacks objectivity, and does little to alleviate the concern. Instead, I tackle those concerns head on - which means stating the concern, and then explaining the solution or another point of view.
The bottom line of the entire article, from the title to the closing paragraph, is that the risk of premium increases now is LOWER than at any point in the history of long-term care insurance, and that LTC premiums today are more stable and sustainable than they have ever been since this line of insurance began. If you choose to interpret that conclusion negatively, despite it's overwhelmingly positive implications for the use of LTC insurance in today's marketplace, I suppose that's your decision.
Many of my colleagues and I have been having the same discussions recently so we can best frame the conversation for clients. Once we explain the history (as you did above) and note the new products and options that are available, the clients can consider a different perspective from the general media comments.
We strongly believe that looking at all risk sharing options, especially in the health care arena, is critical to helping clients gain as much flexibility and self-determination as is possible in an otherwise chaotic atmostphere.
I hope more people pick up your post on this issue so the discussion expands further.
It's important to bear in mind that there's a HUGE difference between an industry shakeout because carriers don't find it profitable to write coverage, and any risk that someone won't get their benefits for the premiums paid.
Bear in mind, if the insurer is FULLY funded and has 100 cents to pay every $1 of claims, the carrier may still stop offering coverage because there's no PROFIT in the insurance (since they "only" are getting $1 for every $1 of claims), but it still means claims are fully funded. There's a giant chasm between the lack of profitability ON the insurance, and the risk that there won't be enough money to pay claims FOR the insurance.
In addition, while the premium increases that have occurred are viewed negatively, the reality is that those increases help to further shore up the financial stability of the insurance pool to ensure that every policyowner will be paid every dollar of claims (although it does little to help insurers make a profit).
But again, the bottom line is that the industry consolidation and companies are leaving because LTC insurance isn't profitable for them is a VERY long ways off from any risk that policyowners won't get their claims paid.
I hope that helps a little?
Re your comments; "both colleagues and clients are concerned that not only will their policies eventually become too expensive, but that they will become worthless after having paid thousands of premium dollars. Watching the recent shakeout in the industry, and hearing about the difficulties the remaining insurers are having, does not inspire confidence in their long-term viability."
My personal experience with a major LTCI carrier that has discontinued its individual LTCI line has provided comfort with claim service they have provided to a client of mine who had owned the policy for about 10 years before filing the claim. Claim service has been outstanding as I have closely monitored the client's experience over the past 18 months. This company had been granted premium increases prior to the filing of the claim. That being said, I prefer to recommend only the financially strongest companies who have expressed a commitment to LTCI going forward.
Lately we have been doing more to educate our agents and clients about incorporating LTC riders or Living Benefits into a life insurance policy. By coupling both Living and Death Benefits, clients CAN guarantee themselves a certain premium to never be increased and that a certain living benefit will surely pay out if/when needed.
This strategy is changing the paradigm of life insurance sales. I encourage everyone to ask questions and learn more.
I just got back from a carrier meeting and they are excited about the profit potential in products with the current actuarial assumptions. The next change will be sex-distinct pricing among the leading carriers.
Finally, people want guarantees in premium but there is a stiff price for those options. Life/LTC options are nice but often the opportunity cost of capital is overlooked compared to a pure protection product.
Assuming the regulators are smart there should be good opportunities for buying LTC Insurance in the next decade.
How many people are there, who don't have ltc insurance, who qualify for a claim based on their health condition? Can the insurance companies know about the size of this emerging population if they don't wind up as a metric anywhere? How is this population counted as a metric if they don't wind up paying for nursing care in a home or through an agency. And if they don't, how can insurance companies possibly set their rates?
Indeed, what percentage of the elderly population is being taken care of by non-professional caregivers or family members?
This would mean that people who do have ltc insurance are more likely to make claims than the general population that doesn't own insurance. Basically, ltc insurance, if this is true, is a ticking time bomb. And with the latest developments in medicine that keeps infirm people alive but unable to care for themselves, the future of ltc insurance is more than grim.
In practice, this problem is limited, for the simple reason that LTC policies have caps on the maximum claim (because there's only "so much" benefit pool available before it's exhausted). In point of fact, this is partially why companies have eliminated lifetime benefits - because it's easier to manage the risk when the claim is not indefinitely open ended.
That aside, it's not difficult to adjust pricing for the fact that LTC purchasers may have above average needs relative to the general population. LTC companies long ago adjusted for this in their pricing, just as annuity companies use above-average mortality tables to price immediate annuities because the population of annuity buyers end out having longer life expectancies. Of course, LTC insurance companies can further control this with underwriting as well (which makes it easier to manage than with annuities that aren't medically underwritten).
So yes, it's certainly reasonable to expect that people who buy LTC insurance will have somewhat higher claims incidence than the general population, but this isn't news to insurance companies. They've been pricing for this from the start. Most of the "unexpectedly high" claims the LTC companies are experiencing is NOT because people are claiming more than projected, it's because there are more people keeping their policies until claim (due to the lower-than-originally-anticipated lapse rates). But that too is now "old news" for insurance companies and incorporated into their current pricing.
As for medical improvements, those can actually help LTC companies as much as it hurts them. Remember, claims are capped no matter what (outside of lifetime benefits policies that were rare in the past and no longer sold now), so improved health and greater longevity simply means people can survive longer before needing care in the first place - which actually means the insurance company collects premiums for a longer period of time and ends out even better off.