Crumbling Economics Undermines Long-Term Care Offerings

All publicity may not be good publicity after all, the long-term care (LTC) insurance industry discovered last month.

The industry named November “National Long-Term Care Insurance Month” in hopes of raising awareness of the “need” for the product. However, the bulk of the month’s press highlighted LTC’s drawbacks as it focused on the woes of two key insurers, MetLife and John Hancock.

In early November, MetLife announced that it will stop selling LTC insurance as of Dec. 30. Although it will continue to provide coverage for current policy holders, it will no longer write new policies. It will also discontinue new enrollments in group policies and multi-life plans starting next year.

Meanwhile, John Hancock asked state regulators for an average rate increase of 40 percent on most of its existing policies. The insurer also plans to raise the price of new policies by 24 percent in 2011. John Hancock has stopped selling policies to employers that offer the coverage as an employee benefit but, unlike MetLife, it will continue to sell individual policies, so long as it can find anyone willing to pay its new rates.

There was no single event in November that crumbled MetLife and John Hancock’s LTC business. These two announcements were just the latest signs of the slow decay of the LTC insurance industry as a whole. The problem is not the economy, or any other environmental factor; it is that selling LTC insurance is an unprofitable venture.

The purpose of insurance is to spread the cost of a highly unlikely and catastrophic (read costly) event across a group of people. Instead of risking a potentially large loss, the insured takes a small, known loss in the form of a premium. The key is that the event must be unlikely. If it is too common, affordable premiums will not be able to cover the cost of the claims and still leave a profit for the insurer.

As any insurance salesperson would confirm, as we age our likelihood of needing long-term care approaches certainty. The risk no longer fits the “unlikely” category, and insurance becomes an inefficient and inappropriate solution.

As claims increase, the insurer passes the cost on to the policyholders in the form of higher premiums. Increasing premiums is only a temporary patch, however. Once premiums go up, those who are at lower risk abandon their costly policies. This leaves an even higher risk pool to share the costs, exacerbating the funding problems.

Persistently low interest rates expedited the industry’s current deterioration. Insurers have been unable to earn sufficient rates on their investment portfolios to fund policy payouts, and therefore have had to rely even more on premiums. According to the American Association for Long Term Care Insurance, insurers need to increase premiums 10 to 15 percent to make up for each 1 percent drop in interest rates.(1) It is unlikely that interest rates will rise enough in the near future to ease the stress on insurers.

MetLife vows that its current long-term care policy holders will not be affected by the recent decision. They will still be covered as long as they pay their premiums and they may even be able to change their coverage terms, depending on what their particular policies permit. However, it is unlikely that those currently insured will be entirely unscathed. Without a younger, healthier group of insured individuals entering the pool, it will be difficult for MetLife to find the cash to cover its claims. As a result, the company will most likely have to raise premiums on its remaining long-term care policies to cover its costs.

In its press release, MetLife acknowledged that LTC insurance in its current form cannot balance financing claims with its business goals.(2) That is, the business is unprofitable. However, MetLife suggested that it may return to the market if a profitable product is ever developed.

That profitable product might take the form of a hybrid policy, one that combines an annuity or life insurance contract with a traditional LTC policy. Several insurers are already beginning to offer policies of this sort. Hybrids are more likely to attract lower-risk customers because, even if a policyholder never needs long-term care, he or she still gets a guaranteed payout. This makes the business more likely to be profitable and sustainable.

While hybrid policies are more promising than traditional LTC insurance, I am hesitant to recommend them. The health care industry is too dynamic to be easily predictable, and these are still relatively new, untested products.

We all face a number of potential expenses that we may or may not incur in our old age. We might need to help support children or grandchildren; we might need to renovate a house that is also aging; or we might be unable to resist buying a vacation home on the beach. We might just live very long and healthy lives and need to provide for our own support.

There is no reason to treat the possibility of needing long-term care any differently from these other possible expenses. In all these cases, one should recognize the need for funds and save and invest appropriately throughout one’s lifetime. Relying on a flawed insurance product is not going to help.

Sources:

(1) Reuters: Is The Long-Term Care Insurance Market Sick?

(2) MetLife: MetLife Will Discontinue The Sale Of New Long-Term Care Insurance Coverage