Private LTCi: A Narrower Or Broader Future?
By Cyril Tuohy
The long-term care insurance (LTCi) industry, which has suffered recently with carriers leaving, scaling back coverage and raising premiums, is at a “critical crossroad” regarding its role in the future of the nation’s long-term care policy.
The LTCi industry can choose to remain a niche industry targeted at the few Americans who can afford paying for it, or it can broaden its mission and become part of the solution to the burgeoning need for long-term care, said Marc Cohen, chief research and development officer with LifePlans, a medical care consultancy in Waltham, Mass.
“It would not be an exaggeration to say that the industry today is at a critical crossroad regarding the role it will play in financing our nation’s long-term care needs,” Cohen said, speaking during a recent hearing on the state of long-term care.
The dynamics of LTCi follow a “Tale of Two Cities” metaphor. The individual market, with $10 billion in premiums annually, is in decline. The group market, with as many as 2.6 million certificates in force, continues to grow.
In the individual market, annual sales in 2010 were 65 percent lower than in 2000, with average annual growth of 6 percent between 2009 and 2012, Cohen said. In the group market, compound annual sales growth is more than 5 percent.
In the individual market, where about a dozen insurers are still active, policies are sold mainly through agents and financial advisors, and in the group market, where fewer than eight carriers are active, the policies are sold through sponsors and employers, he said.
Average premiums in the individual market come to about $189 a month, but in the group market to only $57 a month, depending on individual policies.
In 2000, the individual market made up 75 percent of all sales while the group market made up only 25 percent of sales. By 2010, the individual market only made up 58 percent of sales and the group market made up 42 percent of all sales, he said.
Cohen, who testified recently before the Commission on Long-Term Care, offered one of the most detailed analyses of the LTCi market. LTCi, many experts agree, has a vital supporting role to play in funding the long-term care needs of the nation.
The bigger the role of the private market in long-term care, the less taxpayers will have to rely on big public programs, for which – other than Medicare and Medicaid – there is little political and public support.
For the LTCi industry, the question is how broad a role it wants to play. With the number of insured lives at only about 7.2 million, or about 10 percent of the total market, the LTCi market is underpenetrated and there’s plenty of room for growth.
An optimist would conclude that 10 percent penetration means “tremendous opportunity out there for the industry to play a broadened role,” Cohen said. But a pessimist could argue that after 30 years, the penetration rate is low.
Cohen said that the main sticking point for LTCi growth is that policies cost too much, and with interest rates so low carriers have been unable to derive enough profit on their invested reserves. As a result, prices have gone up, and they’ve gone up for younger buyers, who already perceive the need for LTCi as relatively low since they are able to care for themselves.
Growing the LTCi market lies with public policies and regulatory approaches to help the industry “reset” itself to attract more middle market buyers and reverse a trend which has seen LTCi sales skew away from middle-income buyers toward the wealthy.
Lower costs, offering more funding flexibility, supporting new combination products, setting term pricing, indexing premiums and benefits, listing LTCi coverage on the health insurance exchanges and mandating employers to offer the coverage would help broaden the coverage to middle market consumers and boost demand, Cohen said.
“Anything that would reduce the cost of policies would make it more attractive,” he said. “However, that is not enough.”
On the supply side, multistate reinsurance pools could protect the LTCi industry to an extent from forces outside the industry’s control, and that would help mitigate the risks and allow companies to lower their capital requirements, he said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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