I JUST HATE …
Rate increases! More than you do!
Why oh why
In our opinion there have been two rounds of rate increases on long-term care insurance policies (LTCI). But given the way state insurance commissioners have approved increases it seems as though they are eternal.
Keep in mind that these rate increases primarily impact standalone or traditional policies sold between 1975 and 2010 when the product was still fairly new. Consider that on average people buy long-term care insurance around age 59 and the majority of claims are filed between ages 80 and 85.
So what? Well, it is through claims history that carriers can validate product design, pricing and underwriting. In early years it took a couple of decades to obtain statistically relevant claims history to understand that the underlying assumptions were faulty.
What were the faulty underlying assumptions? Lapse rates – the percentage of policyholders who would quit their policies. Underwriting morbidity – vastly different from underwriting mortality. Everyone will die eventually. That’s a given. But not everyone will need long-term care. Although the risk projections are extreme as compared to other insurance claims ratios like auto or homeowner’s insurance.
Risk projections are 70% for long-term care once we reach age 65. Auto claims average about one claim in 300 policies. Homeowner’s claims average about one claim in 1300 policies. LTC claims are greater than one in two. It’s a big deal.
The negative effect of low interest rates
And the other faulty assumption, unknown in early days, was longevity. Americans are living years longer today, even with the impact of COVID, than when LTCI was first designed and sold in the mid-seventies.
Now couple these faulty, unknown assumptions with early rate increases denied or delayed by numerous state insurance commissioners. Once finally approved in many states the increases became staggering which led to a phased-in approach. Thus, the eternal rate increases referenced above.
The second round of rate increases is caused by the extremely low interest rates we have experienced over the past decade. When carriers design a product assuming a 5%, 6% or higher percent of return on reserves and interest rates end up at 2% or 3% or lower, there is a big deficit in planned returns. Reserve pools are regulated and provide the funding for future claims. Where have carriers gone to shore up reserves? In-force policyholders.
Smarter future strategies
Some carriers have implemented a strategy whereby in-force policies are not saddled with rate increases which frankly is a lot of work and ticks off policyholders and producers. For these carriers introducing new products or repriced products is a smarter strategy. Leave the current policyholders alone. Charge more to new applicants.
Another strategy is to revise underwriting guidelines. As carriers learn from claims history, we see underwriting changes. Some medical conditions that used to be automatic declines are now insurable depending on the severity of the condition. Others that used to be insurable now are not.
And still another strategy is to design products with the expectation that there will be small increases annually like most other insurance products – health, auto, homeowner’s, etc. Here we’re talking 2% or 3% annually versus much larger increases once or twice a decade.
Only 11% of people aged 50 and older own LTCI and just 6% of long-term care expense is paid by private insurance. Why? Because so few have planned for this expense. If more people bought private insurance, funding of reserve pools would improve. But Medicaid remains the major payor of long-term care expenses. And major by a long shot!
Ways to retain coverage and reduce cost
Today most carriers will provide options to revise coverage and reduce premium when advising of a premium increase. Frankly, we’re not fans of the options and like to offer others. Afterall, carriers are not making a call to every policyholder and discussing health, affordability and financial goals. We find the carrier options too cookie-cutter for most clients.
We encourage policyholders who experience a rate increase to discuss the options presented with their financial advisor or the insurance producer who sold the policy. Then request additional options based on current need and affordability.
Generally, we look at reducing coverage in the following order of priority:
- What are the optional riders? Are they still important?
- What is the daily or monthly benefit amount? Given the current and future cost of care, is the amount just right or over-insuring today?
- What is the benefit period? Is the duration of coverage appropriate given the policyholder’s age?
- What is the elimination period? Be careful here. About 40% of claims last less than one year. You would not want a 365-day elimination period.
- Inflation options. Be careful here, too. This is the very last component of plan design that we every want to revise. It is the costliest component but a change can significantly impact coverage.
Insurance remains the best funding option for quality care
Will we continue to see rate increases? Yes. However, policies sold after 2014 have more stable underlying assumptions. Respected actuarial firms expect that less than 10% of policies sold in 2014 and later will experience a rate increase. And the increase would be less than 10%. That’s a huge difference in rate stability from the early days of LTCI.
A rate increase presents an opportunity to reevaluate cost and coverage. In our experience, many clients can reduce coverage purchased long ago and still maintain robust benefits with little increase in premiums.
We spend a lot of time talking about premiums. My suggestion is that we change the focus to the quality of care. After all the name of this insurance is long-term care not long-term premium. It’s about the quality of care when we need assistance.