General Observations.
As I mentioned in the overview, long-term care insurance is not the cake walk many companies expected. Most carriers anticipated immediate and huge success by expanding into one of the few new market opportunities to come along in the past 20 years. But, despite an aging population and a federal government increasingly reluctant to pay for long-term care, the idea of LTC insurance has not caught on as quickly as the insurance industry had hoped. True, sales are clipping along at a yearly increase of 21%, but for insurance to really make a difference as an alternative source of funding for long-term care, at least 40% to 60% of those over age 65 should own LTCi. This would create efficiencies of scale allowing premiums to be more affordable and would create a "band wagon" effect ensuring continuing sales of insurance. The truth is, nationwide, less than 10% of individuals over age 65 own LTCi. Participation in large, employer group, voluntary-pay plans, nationally is about 6%.
But rather than despair, I believe LTCi insurance is a product whose time has come. It just may take more time. I also believe employers have a vested interest in promoting long-term care insurance. A survey from the National Family Caregivers Association, released in October, 2000, reported that 54 million Americans are involved in family care giving. Many of these are full time employees. Estimates of the cost to employers for employees involved in long-term care range from $20 billion to $50 billion per year. It makes sense economically for employers to promote the product. If you believe as I do that insurance can and will make a difference, then you as an employer can help by designing and implementing a good plan from a strong, committed carrier. Or if you already offer a plan, you can add enhancements to improve employee participation.
Company Financial Strength and Size.
Financial strength and size are very important. First of all, LTCi is generally considered a product for the aged. It is true that about 40% of long-term care recipients are younger than 65 with a large portion of these under age 35. But many of these people were born with disabilities or developed them early in life. These disabled generally did not come from the working population. And they make up a tiny fraction of traditional nursing home or assisted living residents. If these younger care recipients need facility care they are accommodated in special intermediate care facilities. Their care is almost always funded by Medicaid or SSI and rarely does the cost come from family or private funds.
Most employees buying LTCi will probably not make claims until age 78, which is the average claims age nationally. In 1999, the average purchaser of group long-term care insurance was aged 43. Thus, the average worker may not make claims for 35 years. (Don't forget that unlike all other group insurance, employees will keep their group LTCi for life. To buy a new policy at retirement age would result in new premiums 6 to 10 times higher). You can see that it is extremely important to pick a company financially strong enough and large enough to be around 35 years from now.
Small poorly rated companies selling only 2 or 3 lines of insurance, including LTCi are particularly vulnerable for the long-term. This is because few companies have more than 10 years of claims experience. With such limited experience most companies don't have definite actuarial guidelines for the premium reserving required for claims 20 to 30 years from now. If claims experience turns unfavorable, it will take a large company with deep pockets to continue to service claimants. Small, poorly rated companies will have little chance of surviving a bad claims experience.
The second reason for picking strength and size is because of the current market environment. The current market is not large enough for all the players. In 2000, 13 companies controlled about 90% of the market and these carriers continue to consolidate and grow market share by buying out discouraged carrier's business. The other 10% of the market belongs to over 100 companies. It takes a lot of money to introduce a new product, build market share and reach a critical mass of premium income that eventually starts producing profits. Only large, successful companies have the resources to stay the course and build market share. A good example of this problem is Penn Treaty Network America, a $400 million insurer, selling primarily LTCi. By insurance company standards Penn Treaty is considered small, yet in 2000 this company produced substantial new LTCi premiums. Penn Treaty is not large enough to have enough excess capital to fund it's growing sales and has relied heavily on new equity issue to fund growth. With equities gone south the company can't find additional capital. It must either find a potential buyer or go out of business. Other examples are CNA and Conseco which have been downgraded by the rating agencies due to financial problems. It is likely that part of a management fix from both companies would be a purging of unprofitable lines of business such as long-term care insurance.
Company Commitment to Long-term Care Insurance.
I think it's crucial to pick a carrier that has a long-range commitment to long-term care. Even market leaders such as CNA seem to be rethinking their participation in the market-at least with regard to non-group sales. I believe many carriers are selling the product as a defensive move-they don't want to be left out if sales really start soaring. Without a firm commitment, they won't stay with it if the going gets tough.
A good indicator of the commitment level is to observe the level of resources devoted to a company's long-term care business. For instance Allianz is serious because it dumped its third party administrator and acquired LifeUSA which has an established LTCi administration department. This was an expensive move but one that signals commitment. Northwestern Mutual is serious because it formed a separate company that only sells long-term care. These are but a few examples.
Another indicator of commitment is the amount of market share a company has. Obviously a larger market share is going to commit a company to staying with long-term care insurance because of a substantial financial obligation.
Rate Stability.
To the best of my knowledge, no insurance company is selling long-term care insurance with "non-cancellable" premiums-meaning premiums are guaranteed not to increase over the life of the policy holder. For an industry with little claims experience, to guarantee rates for insureds who may not collect for another 40 years, would be committing financial suicide. Some carriers do offer short-term, initial rate guarantees but these are limited. All policies I've seen, including the ones with limited guarantees, use "guaranteed renewable" premiums. This means, once the coverage is approved, the company cannot increase premiums for an individual policy holder for a change in age or health. The company can, however, file a rate increase for a class of policyholders or all policy holders on a specific contract form in any given state. By the way, it is illegal for any agent of a company to leave an impression with an insured that guaranteed renewable premiums will stay level forever. They might, but that possibility cannot be stated as fact.
The current intent of insurance regulators is to promote rate stability in the LTCi industry, much like the stability we see in life insurance. This is primarily to protect older policyholders on fixed incomes from losing their policies if rates go up. But even the regulators know that a lack of long-term claims experience makes it difficult to predict future claims. Still, companies have been eager to favor public confidence by keeping increases under control. Rates industry-wide have been reasonably stable over the past 10 years. We occasionally read about 70% increases causing a spate of retaliatory law suits, but this is the exception rather than the rule.
It's difficult to identify companies that may have to file for premium increases sometime in the future. Ironically, the companies with the lowest premiums may not be the ones in trouble. There are two tools to use that can give us clues to which companies have adequate premiums and which don't. The first is the "Long-term Care Experience Reports" published annually by the NAIC. The most recent edition shows actual claims loss ratios from 1992 to 2000. Companies with high loss ratios may be more likely to need future rate increases. However, for various reasons, this is not always an accurate predictor.
The second and more useful indicator is the company's underwriting philosophy. Since many group plans are not medically underwritten we can still determine underwriting from the company's approach to obtaining bid information, benefits offered and how aggressively the company tries to increase participation rates. With individually underwritten policies, a recent study by consulting actuaries Millman & Robertson Inc., reports that companies with "loose" underwriting procedures have about 3 times the claims loss ratio in the first three years than those companies with "tight" underwriting.
As a rule, underwriting philosophy combined with loss ratio is a more accurate predictor for rate increases. For policies in-force 5 to 9 years, the average loss ratio for "loose" underwriters was still about 45% higher than "tight" underwriters. It appears that underwriting will have the greatest effect on rate stability.
What Happens if Your Carrier Sells Out or Goes Out of Business?
If you pick a large well-rated carrier with a commitment to LTCi, the scenario above should not happen. However, if your coverage is sold, my experience has been that the acquiring company often respects the rate structure and a rate increase doesn't occur at least for awhile. On the other hand, if the selling company got out because it was unprofitable, then the acquiring company may find it necessary at some future date to raise the rates on the acquired policies. We see this happening for example with John Hancock raising the rates on the policies it acquired from Fortis.
In the event of an insurance company failure, insureds will not lose coverage. The insurance commissioner for the state in which the company is registered, almost always finds a buyer for the defunct company's policies. But even if no buyer is found, then the state guaranty fund still keeps coverage going. All insurance companies doing business in the state are assessed by the fund to continue coverage and pay claims for the defunct company's policies.
You might question why your initial carrier selection is so important with this amount of default protection available. The answer is, if the coverage was to blame for the defaulted company failure, then it won't benefit an acquiring company either. Chances are the new company may follow with a rate increase for existing insureds.
In the case where no buyers are found and the guaranty association gets stuck with coverage, Insureds would be in limbo. No new enrollees could sign on. With no claims department available, getting claims paid would be a nightmare and switching coverage to a new carrier would probably be impossible. Finally, many guaranty associations limit coverage, for example $300,000 total claims per claimant may be imposed.
Related Article:
Free Long-Term Insurance Quote:
UK Travel Insurance