Managing escalating LTCi premiums

As the product itself matures, industry looks to redefine its approach

  • Price
  • Product
  • Promotion [communication]
  • Place [distribution]

The concept is dated but still applicable in explaining the levers available to a marketer of a given product. A product may be initially launched with a certain marketing mix but to sustain sales, the marketing mix may be changed over time to compensate for changes in demand and external factors. An example is how we buy and consume music. I am so old that as a teenager, I would go to a music store and buy an album [as in vinyl], bring it home and listen to it on a record player. The record player was plugged into a power outlet along with a receiver and a pair of speakers. Today, we buy music by the song on the internet and it is stored on a portable electronic device or in the cloud. These changes came about because the physical aspects of the product changed. We no longer need the actual album and we are no longer restricted by the stationary nature of the equipment needed to “utilize” the product.

Thus the distribution changed and so did the price. In other words, due to scientific progress, the product “music” holds almost none of the initial characteristics. If we apply the same analysis to long-term care insurance, we discover that though there have been significant changes in external factors, Price seems to be the primary lever utilized to absorb these changes. Specifically, between 2003 and 2011, the premium for a 55-year old single individual increased by 50% assuming he/she bought coverage with no automatic benefit increase option. The same increase, assuming 5% compound, is an astounding 250%. If overall sales were not affected, that would not be problem, but during the same period of time, new annualized sales went from $1B to $545M. We may have reached a point in time where some of the other levers have to give. First, let’s take a quick look at the changes in external factors. As everyone knows, carriers did make mistakes with respect to lapse assumptions, and those were worked into pricing models during the mid-2000s. Morbidity and mortality had an effect as well, and that was compensated for, again, resulting in higher pricing for new products and increases on in-force blocks. Lastly, we have, during the past decade, experienced unprecedented and continuous low interest rates. And to make matters worse, we know that the Federal Reserve intends to keep those interest rates at current levels into 2015. It appears that to those whose only tool is a hammer, every problem looks like a nail. Adverse experience with respect to lapses, morbidity, mortality, and interest rates all resulted in higher premiums, and to some extent, higher premiums only. Long-term care insurance, as the Product we know it today, was developed in the early-to-mid 1980s and it is basically the same product we sell today 25 years later. The components are: Daily Benefit, Benefit Period, Benefit Increase Option, and Elimination Period. As interest rates decreased, the Benefit Increase Option, and in particular 5% compound, became the cost driver. As an example, in 2003, a 55 year-old insured only had to pay 45% more for 5% compound. In 2011 he/she would have to pay 240% more for 5% compound.

Carrier response from a product development standpoint, have been two-fold: First, most carriers have launched 3% compound, but though it is obviously priced lower than 5% compound, it does not fundamentally change the problem of guaranteeing an interest rate for an extended period of time.

Second, two carriers have offered drastically different product solutions. One was Prudential’s Evolution product which unfortunately never gained much traction and Prudential has since left the industry.

The other is John Hancock who offers two unique benefit increase options: 1. CPI compound, launched October, 2006, whereby an insured’s benefits are tied to the Consumer Price Index [CPI-U] and… 2. Benefit Builder, launched August, 2012, whereby an insured’s benefits are increased by a crediting mechanism similar to a dividend paying life insurance contract. Both of these products fundamentally address the interest sensitive nature of long-term care insurance and consequently tend to be competitively priced. So, problem solved? Nope. Why not? Because these types of products, including the aforementioned Evolution, do not lend themselves well to “spreadsheeting.” This comment is to be taken very tongue-in-cheek and does by no means suggest that producers can only sell what fits onto a spreadsheet. Carriers are to blame too, as they frequently produce comparisons to their peers in the form of spreadsheets of financial strength, features & benefit, as well as premiums. And lastly, there are the consumers, who want to make sure they get “the best deal” and consequently at times request endless comparisons. Which leads us to Promotion. In its infancy, the target market for long-term care insurance was the “Recent Medicare Crowd;” those ages 65-72. I assume the idea was that since this demographic group was making decisions surrounding their health care, we might as well throw long-term care insurance into the mix. The messaging focused heavily on independence: Avoid the nursing home, and don’t be a burden to your children and / or family. This message was delivered via cold calling, cold mailing, and seminars conducted at senior centers and libraries. Today’s messaging has changed to one of retirement income planning. The issue of long-term care, and therefore long-term care insurance, is now part of a plan, and the discussion is initiated by a trusted advisor such as a financial planner, stock broker, accountant, or to a greater and greater extent, the individual’s employer!

Today’s messaging has changed to one of retirement income planning. The issue of long-term care, and therefore long-term care insurance, is now part of a plan, and the discussion is initiated by a trusted advisor

So, today’s messaging is geared much more to younger [at least younger than ages 65–72] consumers, and this trend was partially the result of demand – younger people saw the financial, emotional, and physical effect a care need can have on a family – and partially the result of segmentation marketing by some agents and distributors. In other words the Place – or distribution – of long-term care insurance has changed. Or another way of putting it: successful distribution has become more efficient and the reason for this increase in efficiency is that we now target a much larger segment of the population. As mentioned, the original target market was those ages 65-72 and the goal of the outlined marketing efforts was to secure an appointment to present the product and then close the sale across the kitchen table over the next 1-3 meetings. This was not very efficient! Over the past 25 years, the most successful producers are those who have embraced the two critical success factors of efficient distribution: Market Expansion By simply targeting those ages 45–60, the pool of potential customers grew exponentially. Additionally, as underwriting on long-term care insurance became more restrictive, dealing with a relatively healthier portion of the population meant fewer declined applications. Segmentation Let’s find something these people have in common other than their age! The first step was association marketing which developed into professional association marketing which was the forerunner for employer group marketing. Granted, the IBMs of the world were early movers into offering their employees long-term care insurance, but for companies with < 500 employees, long-term care insurance was virtually non-existing as a benefit 10-15 years ago. So if we look at where we have been and where we are today, it looks something like this: Long-term care insurance was insufficiently priced with respect to lapse assumptions, mortality and morbidity. That was compensated for in higher premiums; Price. Continuous historic low interest rates for the past half-a-decade and for at least another 3 years, brings us to a crossroads. Changes in Promotion and Place have already had their positive impact on the industry, so the question really is: “Do we… :

1.… go down the road of yet higher pricing on the existing product platform?” 2.… develop drastically different products?” I believe the answer is yes & no to both. How is that for clear messaging? What I mean is that we as distributors should promote lower benefits on the existing product platform while remaining open-minded toward new product design solutions. From a producer standpoint, the problem with the relatively low premiums up until the early 2000s was that we became hooked on unlimited benefits and 5% compound. Why did we sell it? Because we could! The result is that we know what our vastly over-insured clients from 10+ years ago have for coverage, and we wish we could the same thing for the people we meet today.

But we can’t. At least not for the same premium. So what can we as producers and distributors do? We can protect them and their family’s financial, emotional, and physical well-being by offering them more average benefits while at the same time encourage and work with carriers on products and delivery systems that are designed for the segments of the industry where we have experienced significant sales growth over the past decade: The small-to-medium sized employer group market place, the affinity market place, and the financial advisor market place.

by Henrik Larsen, MBA, CLTC

Mr.  Larsen, MBA, CLTC, is VP, Marketing of Advanced Resources Marketing, a national distributor of Long-Term Care insurance based in Boston, Mass.

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