The long-term care insurance business may get a lift from the Federal Reserve’s recent move to increase a key interest rate for the first time in nearly 10 years. That’s according to LTCi executive Jesse Slome.
He foresees a time when rates on newly issued LTCi policies actually may decline from then-current rates.
That won’t happen today or even next year, because the Fed’s recent move was a modest 0.25 increase on short-term interest rates, said Slome, who is executive director of the American Association for Long Term Care Insurance (AALTCI).
More increases will be needed - especially increases to 3 or 4 percent or higher on long-term interest rates - in order for LTCi carriers to reconsider pricing direction, Slome told InsuranceNewsNet.
The long-term rates — currently hovering a little above 2.5 percent — need to be comparable to those before the last recession, in the range of 4 to 5 percent, he said.
Even a 1 percent increase in long-term interest rates could make a difference, he said. AAALTCI data indicates that such an increase could translate into a 10 percent to 15 percent decline in LTC insurance premiums, if other conditions are favorable.
A glimmer of the positive
But even in the interim, Slome sees “a glimmer” of positive news in the Fed’s rate action last week.
If short-term rates continue to rise incrementally as occurred last week, he said, that may enable LTCi carriers to keep rates where they are on new policies. This curtailment of LTCi price increases on new business would introduce important financial stability into the pricing environment, he said.
In addition, the slow but steady increases would enable carriers to invest maturing money and new money coming in at higher rates. That would enhance both profitability and stability, Slome said. The ripple effect “would be an increased likelihood that today’s LTCi carriers will stay in the business rather than leave.”
The thing for LTCi professionals to focus on for now is that “the interest rates are rising, and that things (in the market) could change pretty quickly if this continues,” Slome said.
By quickly, he means in a couple of years, not months. If long-term interest rates go up to, say, 4 percent in a few years, it’s conceivable that new carriers may come into the market or former LTCi carriers may think about re-entering the business, he said. “The global economy may attract players too.”
New carriers won’t have business on the books supported by reserves from the lower-interest era, he pointed out. This may spur them to compete for business by pricing their policies below the rates of the then-current carriers.
If that happens, existing carriers might start cutting their rates too, he said.
Product change also needed
The LTCi market then may enter a period of expansion. This would be all the more likely if LTCi carriers were allowed to use an increasing premium price structure, Slome contended. “Some carriers have proposed this but the regulators won’t allow it, at least not so far.”
When LTCi first came out, the target market was for people in their 70s, and the coverage was primarily to pay for nursing homes, he said. That’s when the level premium structure was established.
But today’s standalone policies cover more than nursing home care, and carriers are increasingly trying to sell to younger people in their 60s and 50s. However, requiring a level premium for 20 or more years doesn’t allow carriers to adjust to unforeseen market conditions, Slome said.
If LTCi carriers were allowed to issue “increasing premiums” or “step-up premiums” with their LTCi policies, that would help stimulate more development and expansion in the market, he predicted.
Whatever happens with interest rates, “the current products will still have to change,” he said.
InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at firstname.lastname@example.org.
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