Birth of LTCi: Fatal miscalculations spur decades of angst

[Editor's Note: This is the first in an ongoing, occasional series on long-term care insurance.]

Long-term care insurance was never priced incorrectly, Jesse Slome maintains. In fact, he is almost annoyed at that nearly universal misperception.

"There were assumptions that were made that turned out not to be correct," said Slome, executive director of the American Association for Long-Term Care Insurance. "But when someone says 'Oh, they were incorrectly priced,' it's typically said with a tone that they set out to do that."

In fact, the assumptions stood on a quite reasonable foundation, Slome explained. But two things did not play out as insurance executives and actuaries expected: the changing dynamics of long-term care, and the lapse rates.

Fast forward a few decades, and LTCi is a perplexing product landscape. The need for the product is overwhelming, yet, insurers are busier trying to maintain old blocks of business that are actuarily unsound.

That means repeated rate requests in states across the country. It means reduced benefits. It means denying coverage to nearly half of applicants who most need it. Finally, it means some insurers have gone insolvent. Many others have left the LTCi business entirely.

Meanwhile, state insurance regulators struggle to weigh the needs of policyholders against the needs of insurers. It has pitted state against state in some instances.

'A very simple product'

LTCi began as nursing home care insurance in the 1970s.

"It was a very simple product," Slome recalled. "You priced it. You sold it to elderly people. And if they went into a nursing home, you would pay benefits."

As time went on, however, people began turning to home health care, and various assisted living options. Insurers responded in kind, adding "bells and whistles" to LTCi products to cover these alternatives, Slome said.

And the products proved very popular. Insurers sold 500,000-plus policies each year from the mid-90s through the early 2000s. Over time, however, the trends worked against insurance companies.

People lived longer. Quality of care and options increased as seniors looked to long-term care as a life extension. They did not lapse their policies at rates anywhere close to what actuaries had predicted.

"Other products that they thought would be comparable had significantly high lapse rates, meaning people would drop the policies," Slome explained. "So they started long-term care with lapse rates that averaged about 4%, which, by comparison to other products that the actuaries were looking at was conservative, but it wasn't conservative enough."

Lapse rates actually settled at around 1%. That difference might not seem like a big deal in the abstract, but it is a very big deal.

"Once people bought this, they started to grow older," Slome said. "They started to see their health change. They started to see other people who were needing it. And they did not drop the coverage."

Consider the simple math: for example, let's say Genworth sells 100,000 policies. At a 4% lapse rate, after 20 years, 80% of those policies are gone. The industry average is to pay claims on about one-third of active polices, so Genworth pays claims on about 7,000 policies.

Using the same example with a 1% lapse rate leaves Genworth with 80,000 active policies after 20 years. Now they can expect claims from 25,000 to 30,000 policyholders.

Rate hikes sought

As a result, Genworth needed premium adjustments – and lots of them. Data from just one state – Virginia – shows Genworth sought 17 rate hikes from regulators from 2016 to 2022. And Genworth is not alone. John Hancock Life Insurance Co. sought 13 rate hikes during the same timeframe, and MetLife Insurance Co. or Metropolitan Life Insurance Co. also requested 17 rate hikes.

The Virginia State Corporation Commission, the state's regulatory authority, reports 149 approved rate hikes for LTCi in the state since 2014. Another 35 rate increase requests are pending as of this week.

"Nobody likes to pay more, but with long-term care insurance, people tend to understand what they have," Slome said. "The insurers will need to continue to get rate increases to make sure that they're getting a return so that they can pay claims. And rising interest rates will inevitably help."

Besides rate hikes, insurers will often present LTCi policyholders with RBOs [reduced benefits options]. However, RBOs are concerning to regulators, who are not convinced consumers are receiving accurate information about all of their options, and are too often making emotional decisions.

The National Association of Insurance Commissioners' Long-Term Care Insurance Task Force recently heard a presentation on the impact of RBOs.

Regulators are not hesitant to crack down on insurers who hold back benefits absent an RBO agreement. John Hancock Life & Health Insurance Co. recently agreed to pay $26.3 million to New York consumers after a state investigation found it prematurely terminated LTCi policies before policyholders had exhausted their benefits.

The state Department of Financial Services said John Hancock improperly ended 156 insurance policies early between 2001 and 2019. Policyholders lost 27,161 days of unpaid benefits, and many were forced to pay expenses out-of-pocket or access Medicaid for coverage, regulators said.

The insurer was also accused of miscalculating maximum lifetime benefits when insureds used less than the maximum daily benefits under their policies.

Crucial protection

Kevin Patrick Peters is a wealth advisor with XML Financial Group in Rockville, Md. His mother is 86 and has a John Hancock LTCi policy she bought before her son got into the business.

"She still pays it diligently because she has a half-million dollar benefit there that she's probably going to use," Peters said. "We calculated and she's dumped roughly $50,000 into it, and she has a benefit of potentially a half-million. If she needs it, even if she needed one year of benefits, she's going to get the money back on what she paid in."

Peters's career mirrored the rise of LTCi in many ways. As a young advisor in the 1990s, he sold policies via cold calls. After going independent in 2000, Peters sold a wide range of LTCi policies.

"In that timeframe, I've had people that have gone on claim, people that have gone through rate increases, and ... it's been challenging at times," Peters said. "But none of my clients have regretted purchasing long-term care."

Peters still deals with consumers who have misconceptions about LTCi products and the insurers behind them.

"Some people come in and they say, 'They can raise my rates at any time,'" Peters said. "That's just not the case. They have to go through the insurance commissioner, they have to open up their books, and so forth. But I would say for the most part, our clients are pretty educated about the risks."

In some ways, the industry is to blame for the overly poor publicity, Slome said. Too much of the good associated with LTCi is never known, he added.

"The industry pays out a lot of money in claims every year and increasing amounts," Slome said. "Nobody tells the story. So they have been painted with a very negative brush. And how people think about it is, to a degree, earned or well-deserved, because if you don't tell people what you're doing and how you're doing it, why should anybody believe that you are doing things correctly?"

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected] Follow him on Twitter @INNJohnH.

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