Is Long Term Care Insurance Dying?

Poor results in the long-term care insurance sector have led
many providers to exit the market, leaving its future uncertain, Moody’s
Investors Service says in a new report.

The report, “Long-Term Care Insurance: Sector Profile,” says
that despite the need for non-medical coverage by an aging population, the
product’s future is also in question because of persistent losses and a
challenging operating environment.

“Key credit considerations for the sector are the relative
newness of long-term care insurance and the long-tailed and complex product
structure, which make it difficult to price the product profitably and to
reserve for,” says Laura Bazer, Moody’s vice president and author of the
report.

The industry’s relatively limited claims experience, along
with significant benefit options and long policy horizons have been key
challenges for providers since the introduction of the product in the 1980s,
she says.

Mispriced blocks of older, legacy business have led to
recent reserve increases, causing sizable losses for some providers over the
past two years. The benefits under early policies were often too generous
relative to factors such as actual benefit utilization rates and lapses,
according to Moody’s.

“While recent hefty reserve and rate increases could improve
the profitability of legacy blocks, or at least stem losses,” Bazer says,
“persistent low interest rates and anti-selection could confound the
remediation process.”

New, better designed and priced products seek to reduce
risks for insurers, with changes including more restricted benefits and payout
periods, as well as “combination” policies, which offer long-term care combined
with a life insurance policy or an annuity contract.

Nevertheless, Moody’s believes potential buyers may balk at
fewer benefits and higher rates, and sales could go down.

Bazer thinks current price hikes will help insurers for the
time being, but senior citizens on fixed incomes form a highly sensitive
constituency and regulators could therefore reject or limit new rate requests.

Additionally, the exit or retreat of five key firms from the
market since 2010 leaves only one dominant player, thus the sustainability of
current sales volumes, and indeed the viability of the market overall, is now
in question, according to Moody’s.

MetLife and CUNA Mutual stopped selling LTC in 2010. In
2011, CNA and Berkshire pulled out. This year Prudential stopped selling
individual to focus on group sales, while Unum stopped selling group but had
previously pulled out of individual sales.

According to Broker World magazine, the top 10 LTC insurers
wrote 93.6 percent of the business in 2011, with Genworth writing 38 percent of
the individual LTCI premium in 2011. Genworth, Northwestern and John Hancock
wrote 61 percent of the premium, according to the publication.

Sources: Moody’s, Broker World