Prudential Financial has become the latest in
a growing list of major US life insurers to exit the long term care
insurance (LTCI) market.
In Prudential’s case its exit is limited to
individual long term care products and excludes the group long term
care sector.
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Commenting, Prudential Group Insurance
vice-president Malcolm Cheung said: “The decision to exit the
individual long term care business reflects the challenging
economics of the individual market and our desire to focus our
resources and capital on the group market where we see the greatest
opportunity.”
On Prudential remaining in the group LTCI
segment, Cheung said: “For more than 25 years, group long term care
insurance has complemented our broader insurance product offering
which includes life, disability, accidental death and
dismemberment, and dental.
“The demographics of the employer market align
well with our strategy of providing voluntary benefit solutions to
individuals through our group marketing and distribution
platforms.”
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By GlobalDataAccording to a study by Allen Schmitz, a
principal and consulting actuary for Milliman, the group LTCI
market comprises about one-third of the total in-force lives, but
only 20% of the total in-force premium.
Schmitz explained that the difference is
largely because in the group market cover is primarily sold to
younger individuals with an average issue age in the lower 40s
while in the individual segment buyers are usually in the upper 50s
and thus attract far higher premiums.
The study was published by the Society of
Actuaries in mid-2011. According to Schmitz, sales in the LTCI
market were almost $700m in 2010 while at the end of that year
there was almost $11bn of in-force premium covering more than 7m
people.
Prudential is the fifth major player to exit
the LTCI market, albeit on a partial basis. Its announcement
followed Unum Group’s decision to discontinue the sale of group
LTCI products during the first quarter of 2012.
Unum ceased selling individual LTCI products
in 2009. Following a similar argument to Prudential’s,
Unum president and CEO, Thomas R Watjen,
stated in the insurer’s annual results release: “The decision to
discontinue new sales of group long term care policies and move
this business to our closed block allows us to further refine our
focus on the markets that provide the greatest long-term
opportunity for our company and create maximum value for Unum
shareholders.”
Unum took a $561.2m after-tax charge in 2011
to increase LTCI policy claim reserves. Complete exit from the US
LTCI market began with Allianz Life in November 2009.
Allianz was followed in November 2010 by the
US’ largest life insurer, MetLife. In January 2011 Berkshire Life,
a unit of Guardian Life, became the next insurer to exit the LTCI
market.
While a number of major carriers such as New
York Life have voiced their commitment to the LTCI market, the
general view is that LTC products’ risk profiles are
unfavourable.
In many respects the problem dates back to the
appearance of LTCI some 25 years ago.
At that stage, Schmitz said, carriers had no
experience with lapse rates and used assumptions from products in
the nearest adjacent space, such as other health products.
Problems
Lapse assumptions turned out to be
inappropriate for LTCI policies because more people than expected
kept their policies due to the solid value they provide, resulting
in more policies in force to claim benefits.
In addition, noted Schmitz, many LTCI policies
were sold with lifetime benefits, which have been shown to have
very poor experience for most carriers. Adding more damage, many
policies were also priced based on interest rate expectations that
proved to be too high.
However, exit of some major players does not
rule the LTCI market out for new and all existing players, noted
Schmitz. Their exit creates a big opportunity for others willing to
learn from past errors, Schmitz stressed.
