Against the background
of an ageing population, US long-term care insurance is a product
that should hold much attraction for life and health insurers. In
reality it has proved to be an exceptionally difficult product to
manage; a reality punctuated by the country’s largest life
insurer’s decision to exit the market.
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Highlighting problems in the
US long-term care insurance (LTCI) market, the country’s largest
life insurer MetLife has announced that it will cease writing new
LTCI business at the end of 2010.
“While this is a difficult
decision, the financial challenges facing the LTCI industry in the
current environment are well known,” says MetLife’s long-term care
products vice-president Jodi Anatole.
MetLife noted that despite
its withdrawal from the LTCI market, it is committed to exploring
potential solutions to the need for LTCI, including combining LTCI
with other products, which it believes can effectively address the
long-term care financing needs of the public as well as its
business goals. MetLife currently provides LTCI to about 600,000
people.
Commenting on MetLife’s
decision, an analyst at rating agency Moody’s Investor Services,
Diego Nemirovsky, describes it as a “credit positive” for the
insurer.
“MetLife’s announcement is
yet another indication of the LTCI product’s unfavourable risk
profile,” says Nemirovsky. He noted that the LTCI business line
represents less than 3 percent of MetLife’s financial profile in
terms of reserves, premiums and earnings and was never “core” to
MetLife.
Nemirovsky continued that the
US insurance industry began selling LTCI policies about 25 years
ago in response to the long-term care needs of a growing elderly
population. LTCI policies, he explained, typically offer a
specified benefit that can be applied to a number of health-related
expenses such as nursing homes, home health care and assisted
living when a policyholder is no longer able to perform certain
“activities of daily living”.
Difficult to
price
Because of uncertainty in the
frequency of claims and the long-tail nature of the risks, LTCI is
a difficult product for insurers to price and manage, said
Nemirovsky. He added that it can also be a costly one for insurers
since benefits may continue for many years.
“The life insurance industry
has had a checkered past pricing LTCI correctly,” Nemirovsky says.
The problem, he explained, is that LTCI was a product at inception
unlike any other in the insurance industry. Available experience
data was sparse, and it takes a significant amount of time to
develop actuarial assumptions with a high degree of
certainty.
“Pricing was based on
uncertain assumptions, many of which were found to be incorrect
over time; now, the industry is paying the price,” says
Nemirovsky.
“Two key assumptions that
have needed rethinking are policyholder retention rates and
long-term interest rates,” he says. “Policyholders are retaining
their policies at a much higher rate than insurers assumed when
originally pricing the product because of consumers’ perceived
value of the LTCI, which has led to more claims than insurers
expected.
“Also, long-term interest
rates have fallen and stayed low, which has led reinvestment income
to fall short of insurers’ expectations when they originally priced
policies. Many companies with older blocks of LTCI continue to
grapple with the drag on return on capital, resulting from these
long-tailed liabilities.”
Big hikes
coming
Nemirovsky noted Genworth
Life and Manulife Financial’s US unit, John Hancock, announced they
will be seeking regulatory approval for sizeable rate increases on
some of their closed blocks of in-force LTCI business, because of
unfavourable claims patterns.
Genworth, which operates
across all US states, is seeking an 18 percent increase which it
anticipates will be implemented over two to three years starting in
January 2011.
Manulife is aiming for even
more significant premium rate increase. In its second quarter 2010
results release, Manulife stated that John Hancock “will be raising
premiums on in-force business, and is actively working with
regulators to implement increases that are on average 40 percent
and affect the majority of the in-force business”.
According to financial
services industry organisation Limra, total premium income on LTCI
stood at $10.6 billion in 2009 and covered some 7 million people.
New LTCI sales fell from about $680 million in 2005 to $464 million
in 2009. Nearly 5 million people were covered by long-term care
insurance at the end of in 2009, Limra reported.
Providing insight into the
pricing of LTCI is a study published in June 2010 by the American
Association of Long Term Care Insurance (AALTCI). For its study,
the association analysed data on some 93,500 new LTCI buyers and
found that the typical LTCI buyer today is in their 50s. Among
those under the age of 61, 28.1 percent paid premiums of less than
$999 annually, and 9.3 percent paid $3,500 or more
annually.
Another study by health
insurance industry body America’s Health Insurance Plans (AHIP),
found average annual premium on LTCI sold in 2005 was $1,918, up 15
percent from $1,667 in 2000.
Indicating that LTCI premiums
have lagged well behind the rise in the cost of health care, during
the same five year period the cost of hospital services increased
by 39.4 percent, according to industry body the Insurance
Information Institute (III). Average LTCI premiums in 2005 were
27.4 percent above the average of $1,505 in 1995.
According to Limra, the
average first-year premium for individual LTCI coverage purchased
in 2009 was $2,181, unchanged from 2008 and up 10.1 percent
compared with the 2005 average estimated by AHIP. Between 2005 and
2009, the cost of hospital services increased by 30.4 percent,
according to
the III.
Averages, however, can be deceptive, with the AALTCI
noting that the premiums on virtually equal protection from two
highly-rated insurers can vary by between 30 percent and 80
percent.
