LTCI: Stability in sight?
The Essential Guide
The combination of aging baby boomers and spiraling long-term care costs has created an environment that should be ideal for LTCI sales, but that’s not happening. Sales of individual long-term care insurance (LTCI) policies have been flat or negative in recent years. Several insurers have raised premiums, reduced benefits or tightened underwriting standards; other insurance companies are leaving the market entirely. Should senior market advisors follow suit and focus on other products or is there a silver lining in the LTCI-market clouds?
According to LIMRA, LTCI sales results in 2011 were mixed: premiums increased by 4 percent but the number of lives (i.e., new policy sales) fell by 2 percent. The first half of 2012 was weak, as well: lives dropped by 7 percent versus the same period last year to roughly 108,000. Premiums were 2 percent lower for the same period. Results among the top insurers are mixed, though. Eight companies reported significantly lower business—down 20 percent or more—for the first half of this year. But new premium for the top five carriers combined grew 15 percent through the second quarter of 2012.
Sales of hybrid or combination life policies remained strong. In 2011, these products grew 56 percent, representing the third consecutive year of double-digit growth, according to LIMRA’s 2011 Individual Life Combination Products Annual Review. Total new premium for life combination products reached $2.2 billion in 2011, approximately 13 percent of total individual life insurance new premium. More than 72,000 combination policies were sold in 2011, which make up approximately 16 percent of all long-term care insurance policies and contracts sold in 2011.
Causes of volatility
The sales figures show that it’s certainly a better environment than 2009, for instance. So what’s causing the shake-ups with insurers? Observers cite several factors: longevity risk, persistently low lapse rates and historically rock-bottom interest rates. “There’s so much uncertainty about the health status and the needs for personal assistance of people in very old age,” says Howard Gleckman, author of “Caring for Our Parents” (St. Martin’s Press, 2009) and resident fellow at the Urban Institute in Washington, D.C. “Medical science is making it possible for people to live longer with multiple chronic diseases that once killed them relatively quickly. It’s almost impossible to really predict accurately the needs and the life expectancy of those patients.”
The problem of low LTCI-policy lapse rates has been around for a while. “The good news/bad news on that is clearly the policy owners have seen value in the policy and therefore have not been incented to voluntarily lapse their policy,” says Steven Zabel, senior vice-president for long-term care insurance with Genworth Financial Inc. in Richmond, Va. “The downside of that from a profitability perspective is you just have many, many more people in-force in the book when it comes time to actually file a claim. What we’ve seen is our ultimate lapse rates are right around 1 percent.”
Genworth has been using the 1 percent figure in its pricing for about the past 10 to 15 years, Zabel says, and he believes that data is credible. A more recent challenge has been the Federal Reserve’s decision to hold interest rates extremely low, which reduces insurers’ interest earnings on their investment portfolios. Because policies are in force for longer periods, however, insurers don’t assume that rates will always remain at current levels. “Our product that we currently are filing and will implement next year has a 4 percent interest rate assumption,” says Zabel. “That’s 4 percent over the life of the policy so that’s an assumption that interest rates will stay at a 4-percent level for 30 to 40 years, which I’m not going to say that that’s conservative but we think that’s a fairly safe assumption.”
Genworth isn’t limited to simply tracking current interest rates, though. Zabel says the company has an interest-rate hedging program in place on its older blocks of business. Those derivatives-based hedges help the company lock in interest rates that support its pricing objectives. Although the program hasn’t completely eliminated the interest rate risk, Zabel believes it definitely has mitigated a portion of that risk.
“Clearly the policy owners have seen value in the policy and therefore have not been incented to voluntarily lapse their policy.” ~Steven Zabel, Genworth Financial
Jesse Slome, executive director of the American Association for Long-Term Care Insurance in Westlake Village, Calif., also remains optimistic about the LTCI market’s prospects. “All of the discussion on a policy side about Medicare and Medicaid shrinking benefits will make private options including long-term care insurance far more attractive,” says Slome. “At the same time, companies are unveiling new products that will take some time to gain a foothold but once they do those products will start to penetrate the market.”