LTC Bullet:  LTCi's Toughest Questions Answered 

Wednesday, August 16, 2006 

Seattle-- 

LTC Comment:  Is long-term care insurance affordable?  Will premiums remain level?  Will benefits be paid?  Claude Thau answers LTCi's toughest questions after the ***news.*** 

*** THE BIG 650.  Today's LTC Bullet is our 650^th since the Center's founding on April 1, 1998.  That's approximately one every five calendar days or 1.5 per week.  We hope you enjoy them and find them useful professionally.  If so, please support the Center generously.  If you're not yet a member, join.  If your company or organization is not a corporate member, encourage their management to join.  If they do, you'll get the Bullets and our other services for free.  To join, contact Damon at 206-283-7036 or damon@centerltc.com.  Another way to help is to retain the Center to provide consulting or training such as our highly acclaimed full-day LTC Graduate Seminar (details at http://www.centerltc.com/ltc_grad_seminar.htm.)  Thanks for your support. *** 

*** LTC FORUM.  We expect today's LTC Bullet to invite some feedback:  comments, questions, criticism, or counter-arguments.  We encourage readers to post such remarks to the Center's LTC Forum online bulletin board.  If you have not already arranged to use this service, here's how to proceed: 

1.  Join the Center for Long-Term Care Reform if you are not already a member.  This is a members-only service.  You can join when you register for the LTC Forum in Step 2.
2.  Register with Damon by email damon@centerltc.com or by phone 206-283-7036.  He will give you your user name and password so you can log on.
3.  Click http://www.centerltc.com/bulletinboard/ .
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You may respond to topics and create your own within all eight forum categories.  If you would like to suggest a new forum category, contact Damon directly:  damon@centerltc.com or 206-283-7036.  Please also feel free to contact him if you need further help or have any questions.  Enjoy! 

Fair warning:  comments submitted by replying to today's Bullet may be posted to the LTC Forum for other members to see. *** 

*** PHYSICIANS MUTUAL INSURANCE COMPANY.  A rumor having circulated that Physicians Mutual--a corporate member of the Center--was leaving the LTCi business, we inquired and received the following clarification:  "Physicians Mutual recently announced its decision to transition out of the brokerage distribution channel, effective December 31, 2006. This strategic decision will allow the company to focus on and build upon the success of its other distribution channels including the agency sales force, direct marketing and telesales.  Physicians Mutual will continue to offer long-term care insurance through its agency distribution channel." 

LTC BULLET:  LTCI'S TOUGHEST QUESTIONS ANSWERED 

LTC Comment:  Private long-term care insurance has not been the smashing success most people expected when it launched some thirty years ago.  Part of the reason is that easy availability of publicly financed long-term care crowds out the market for private insurance.  But problems inherent in the product itself have also contributed to its disappointing results.   

Today, Claude Thau tackles three of the tough questions confronting long-term care insurance.  Mr. Thau is a Master General Agent who helps LTCi producers nationwide.  Reach him by calling 800-999-3026, x2241 or email to:  cthau@targetins.com. *** 

WILL LTCI FULFILL ITS PURPOSE?
by Claude Thau 

The question posed in the title of this article is appropriate.  Three issues are involved: 

 1)    Is LTCi affordable currently?
 2)    Will premiums remain level?
 3)    Will benefits be paid (the most important issue) 

I'll discuss the issues in the following segments: 

Why have LTCi premiums increased significantly?
Are LTCi premiums stable?
How can we reduce the risk of rate increases?
Can we make LTCi more affordable in general?
How to maximize chances that claims will be paid.
What if an insurer has a problem nonetheless? 

Why Have LTCi Premiums Increased Significantly? 

Two primary forces have caused the increase in LTCi premiums: 

a)    Interest rates: As with any insurance policy that is priced with a premium that is intended to stay level, the premium is much greater than the cost of LTC for the policyholders in the first year, but insufficient to pay the cost as they age.  Therefore insurers [are required to] set aside reserves that should be sufficient, in combination with future premiums, to pay future claims.  These reserve levels are established and reviewed by state insurance departments.  Insurers recognize, of course, that they will earn interest on these reserves.  The anticipated investment income allows them to charge lower premiums.  (If they ignored such investment income in their pricing, premiums would be much larger and profits, if any LTCi policies were sold, would be huge.)  In the past, insurers priced policies with expectations of investment income that have not been realized, hence they have been forced to increase premiums.  The low interest rate environment we have been experiencing is unprecedented and was not foreseeable.  If any insurer had assumed in their pricing that interest rates would be so low, they would have sold no business (due to the high premiums that would have resulted) and people would have scoffed at any expectations of such low interest rates.  

If an insurer had expected interest rates to be lower and had priced the product with a 1% lower interest assumption, the original price might have increased 12.5% or more.  If the actuary had assumed a 2% lower interest rate, the price might be increased more than 26%.  This would vary based on the client's age and the product design as younger people and products with automatic benefit increases rely more heavily on investment income than policies sold to older people or without automatic benefit increases.  However, if the insurance company did NOT realize that interest rates would be so low and then obtained state insurance department approval to increase premium starting in the 11th policy year, the percentage increase in premium might be 2-3 times as high because there would be fewer years to collect the additional premium and because there would be fewer insured people to pay those increased premiums (some would have died in the first 10 years). 

b)    Lapse rates: As with any insurance policy, some people drop their policies as time goes on.  When people drop LTCi policies, the large reserves mentioned in the previous paragraph are released.  For good reasons, there are no cash surrender values in LTCi policies so the entire released reserve can be used to pay claims for other policyholders (or can drop through as earnings).  Insurers anticipated that released reserves due to lapses would help them pay claims.  Based on that theory, they lowered premiums to make the policies more affordable.  Of course, to the degree that people lapsed their policies, the ultimate claims experience would be significantly lower because LTCi claims increase dramatically with age.  Although insurers predicted the claims incidence by age well, they did not anticipate that so many people would still have their policies at those higher ages.  It turns out that people cherish their LTCi policies and rarely drop them.  The lapse rates have been perhaps unimaginably low.  A 3.5% (arithmetic, e.g. 1.5% instead of 5%) reduction in annual lapse rates might result in approximately twice as many people still having their policies 20 years later, producing a doubling of claims and fewer reserves released to help cover those claims.  Because companies have experienced many fewer lapses than they had anticipated, they have felt pressure to increase premiums for people who bought those policies. 

From an industry perspective, the two factors mentioned above (interest rates and lapse rates) are most responsible for rate increases for new sales and existing policies.  In addition, some of the older policies were priced before assisted living facilities were developed.  Some companies decided to pay assisted living facility claims even though they had not been contemplated at the time the product was priced.  Expanding coverage in such fashion is good for consumers, even if it were to contribute to a price increase.  Some companies have had higher or longer claims incidence than they expected and many have had higher expenses than they anticipated.  But, on an industry-wide basis, claims rates and expense levels have had a minor impact on premium increases. 

Are LTCi Premiums Stable? 

In the investment market, people often buy a stock when its price is inflated, then sell when its price falls to a more logical level.  We are not very good about understanding and exercising the discipline to buy when stocks are low and sell when they are high.  By the same token, when LTCi was under-priced in the past, people blithely assumed that the premiums would stay level.  Now, when prices have been increased on older in force policies, people fear that policies bought today will experience similar price increases.  However, because today's policies have been priced more conservatively; because insurers know more about LTCi now; and because of regulatory actions, the risks of price increases on a policy bought today, while possible, are much reduced. 

Today's pricing is more stable because:
1)    Lapse assumptions in renewal years are generally assumed to be 1.5% or even lower.  There is little room for adverse deviation.
2)    Interest rate assumptions are much lower now (as of May, 2006, interest assumptions are generally in the 5% to 6% per year range).  While a shortfall is possible, it would be much less of a shortfall and there is more possibility that future interest rates will exceed assumptions.
3)    Actuaries now must certify that they expect the premiums to remain level even under "moderately adverse experience."
4)    Regulations impose penalties on carriers who raise premiums under some circumstances and mandate that agents not receive sales commission on premium increases.  These measures will reduce the frequency and magnitude of price increases.
5)    Insurers better understand what sales levels they can expect and can project their in force business better, in order to project what their unit expenses will be.  Actions have been taken to reduce expenses.  The regulatory environment has become more stable, which contributes to lower expenses.
6)    Insurers are more able to identify applicants who are likely to have early claims.  The insurers' risk selection practices allow them to decline to offer policies to people who are likely to have early claims and allow them to classify applicants into groups with more similar likely future experience. This improved capability reduces the risk of future rate increases. 

How Can We Reduce The Risk of Rate Increases? 

a)    Develop expertise, or work with professionals who have expertise, regarding LTCi products, the insurers and how they price their products. 

b)    Use an insurer that gets good health information, such as medical records for all of their applicants. 

c)    Buy from a multi-line company.  If a company is focused primarily on LTCi and the whole industry suffers, that insurer is likely to go into receivership.  A multi-line company is NOT likely to go into receivership.  Therefore the multi-line company has more reason and more ability to avoid or minimize rate increases.  (They fear the reaction of their life insurance, annuity and disability policyholders if they have a LTCi price increase.) 

d)    Recommend products which have reasonable benefits and clear wording.  If the benefits are written in ways that people can take advantage of them inappropriately, people will do so, thereby possibly exposing other policyholders to a rate increase.  If the deal is too good to be true,... 

e)    Recommend policies that are guaranteed not to have a premium after [10] years.  The only good premium guarantee is a guarantee that lasts forever once it becomes effective. 

It is also possible to offset some of the impact of premium increases.  If a purchaser has enough cash flow to pay an increased premium but is concerned about the net cost, a return of premium rider can be very attractive.  If there is a future premium increase for the policy but the client never goes on claim, the full premium increase will end up coming back to the family as a death benefit.  In such a case, the policyholder is simply losing interest that might have been earned had the increase in premium not occurred. 

Can We Make LTCi More Affordable In General? 

The best thing we can do is to sell LTCi when our clients are young, healthy and married!  Obviously, premiums are lower for people who are younger.  Even more importantly, however, if people don't buy while they are young, they are likely to develop diabetes, osteoporosis, arthritis, and other maladies which will make their LTCi more expensive.  Lastly, we frequently find divorced women and widows buying LTCi.  If they had purchased while they were still married, they would have qualified for a significant premium discount. 

We can also tailor the LTCi to the client's needs.  If they need LTC, they may be able to pay some of the cost.  LTCi can be used to tame the cost of the care rather than to pay the entire cost of care.  A lower daily benefit costs proportionately less.  They may also be able to purchase a lower daily benefit if they are prepared to accept a semi-private room or to get care away from more expensive [metropolitan] areas. 

People can reduce their LTCi premium by buying a policy with a longer waiting period.  For example, they can save 10% to 20% by buying a 90 day waiting period instead of 30 days.  However a long waiting period can be more risky for young people because forgoing benefits for 90 days can add up to a lot of money.  If they buy a $120/day benefit and go on claim in 15 years, their benefit will have increased to $240/day (due to the 5% compound benefit increases), so the 90 day waiting period will cause them to forgo up to $21,600 in benefits ($43,200 if both spouses go on claim).  For many people, the impact would be even larger than this example indicates. 

Some insurers offer a calendar day waiting period which counts days of informal family care-giving toward the waiting period.  It is less risky to buy a longer waiting period when you may be able to satisfy the waiting period without purchasing commercial care. 

The states and Federal government are also taking steps to make LTCi more affordable.  For example, there are some attractive tax breaks for the purchase of LTCi.   

Of course, whether something is affordable depends upon a person's resources, what else they want to do with their resources and how much they want the item. 

How to Maximize the Chances that Claims will be Paid 

This is the toughest question.  Our job is to provide insurance which will accomplish its intended goal when the client needs care.  Some of the things we can do include: 

1)    Recommend financially-strong companies that should be around to pay claims in the future.
2)    Recommend insurers which are multi-line insurers, not relying solely on LTCi.  If the whole industry has problems, companies which primarily insure LTCi may go into receivership and perhaps be unable to pay all their claims.  Multi-line insurers may fire their LTCi management team if things go bad, but they will remain in business and will not want to raise rates or deny claims, partly because of the impact bad PR might have on their sales of other products.
3)    Claims are most likely to be paid if the claims policy wording is clear and appropriate.  Clear wording not only reduces the insurer's opportunity to deny a claim, it can also reduce the possibility that an insurer runs into financial problems from having to pay unanticipated claims. 

Some brokers and prospects prefer a "cash benefit" policy, because there are fewer requirements that could cause a claim to be denied.  Unfortunately, "cash benefit" policies are much more expensive, hence may not be a desirable strategy. 

What if an Insurer Has a Problem Nonetheless? 

As noted above, the insurance industry has learned a lot, as have insurance brokers.  Although the risk of price increases has reduced substantially, you might wonder what would happen if your client has LTCi with a company that eventually experiences a problem? 

The prior section explained that a multi-line insurer may be able to absorb poor LTCi experience because of the revenues being brought in by the other lines of business.  Furthermore, to protect their marketing success in those other lines of business, they may be reluctant to raise premiums or may temper any such increase.  The potential regulatory disadvantages of raising premiums might also dissuade them.  Thus, they may choose to absorb [some of] the loss. 

Even a mono-line company would have some recourse available.  For example, it would have its reserves.  It would have its risk-based capital.  It might have higher-than-expected investment income.  It might have reinsurance agreements with other insurers.  It could raise premiums if necessary.  It could cease writing new business to re-direct the financial strain of new sales toward the existing policies' claims.  (Regulators might require that it stop writing new business for that reason.) 

Today's LTCi market is very different from the LTCi market of the turn-of-the-century or earlier.  While uncertainty remains, the stability of the industry and of its premiums is tremendously improved. 

Claude Thau is a Fellow of the Society of Actuaries and member of the American Academy of Actuaries.  He has focused entirely on LTCi since 1994.  Among other roles, he has headed a major insurer's LTCi line of business, has been a consultant to the Federal government and chaired the Center for LTC Financing.