Heading for the exit
Turmoil hits long-term-care insurance companies
With 70 million Americans over age 55, you might think that the long-term-care insurance business would be booming. You would be wrong. Instead, the sector is struggling. Last month, MetLife, one of the largest long-term-care insurance carriers, announced it would discontinue sales of new policies. Several other major long-term-care insurers have raised rates or been placed in receivership in recent years.
The sector, now 30 years old, faces multiple challenges, including higher-than-expected claims; strict regulation; the recession; and historically low interest rates.
“It is a really difficult, expensive and highly regulated business,” says Jesse Slome, executive director of the American Association for Long-Term Care Insurance, which represents brokers. “There’s no question when a leading player in any industry decided to leave the marketplace, it’s never desirable.”
MetLife was a top-five player in the market and had been in the business for 25 years. The company has 600,000 long-term-care insurance policyholders, all whom will be allowed to continue coverage. The New York-based company will no longer accept individual enrollees as of the end of the year, and new enrollments in existing group and multilife plans will end next year, according to the company.
“While this is a difficult decision, the financial challenges facing the (long-term-care insurance) industry in the current environment are wellknown,” Jodi Anatole, vice president of longterm-care products for MetLife, said in a statement. MetLife declined to comment further.
One of the biggest issues, says Jeffrey Lane, senior financial analyst for A.M. Best Co., is pricing the product.
“The older policies didn’t do extensive research on Alzheimer’s or dementia, for instance,” Lane says. “They are getting better at it, but it’s an unknown. You don’t know how to price it.”
Slome agrees. “You need a crystal ball to look out 10 to 20 years,” he says. “Five years ago if you had Alzheimer’s, you died within seven years. Today, people are living 10 to 12 years.”
Many older people are living healthier lives, and have a strong desire to stay out of nursing homes and other long-term-care facilities. But claims costs keep rising, and more policyholders are using the insurance, with fewer allowing their policies to lapse. The lapse rate is between 1% and 1.5%, Slome says.
Today, about 8 million Americans have longterm-care insurance, and the industry paid out $6 billion in claims last year. Market penetration is less than 10%. In 2008, about 180,000 policyholders were “on claim”—using their insurance benefits.
Other top insurers include Bankers Life and Casualty Co., Genworth Financial, John Hancock Financial Services and Transamerica Corp. In October, Genworth said it would raise rates by 18% on some older policies, accounting for about 26% of total accounts. And in September, John Hancock said it would raise rates on longterm-care policies by 40% on average.
Genworth attributed its rate increase to “persistency,” or that more policyholders were retaining their policies rather than letting them lapse, resulting in higher claims than pricing assumed for the older policies. Genworth said in a statement it is still committed to the sector.
The severe economic downturn hasn’t helped matters. The sector was hit harder by the recession than other insurance products, according to LIMRA, an insurance consulting firm that tracks the industry. Sales of new policies fell 24% in 2009, though recovered somewhat this year, according to the firm.
Historically low interest rates also are hurting the insurers, Slome says.
Meanwhile, the industry is highly regulated, and some states can block or reject premium rate increases. Negative media attention about skyrocketing premiums also has caused some potential customers to shy away from products, Slome says.
These predicaments have put some insurers in peril. In January 2009, two Pennsylvania carriers were placed in a trust. Penn Treaty Network America Insurance Co. and American Network Insurance Co. faced negative capital and surplus, and were unable to find a buyer for the business. Some estimate that more than $1 billion in added funds may be needed to pay future claims for its 142,000 policyholders.
To be sure, many aging Americans aren’t aware of long-termcare insurance, typically sold to people ages 55 to 75 years old. This could change with a provision in the federal health reform law.
The Community Living Assistance Services and Supports Act, or CLASS Act, is a voluntary long-term-care benefit financed through payroll deductions. Unlike private long-term-care insurance, this program is guaranteed-issue, meaning members can’t be underwritten or be rejected. After a five-year vesting period, those in need of care can get $50 a day to buy nonmedical services to help them stay in their homes.
If successful, not only could the program relieve some pressure on Medicaid, it could make people more aware of the issue of planning for retirement care. The program is expected to start in 2012 or 2013.
“It gives awareness to financial planning,” Lane says.
Some in the insurance industry were critical of the CLASS Act, saying it is unsustainable and will add to the national deficit.
But Slome says CLASS won’t be a competitor because of differences in benefits and eligibility, and instead it could help overall.
“Long-term care is an enormous issue the country has yet to face,” he says. “CLASS, while not a perfect solution, is at least an attempt to do something.”