Fitch: Long-Term Care Policies Remain Challenging for Insurers [Manufacturing Close – Up]

Fitch Ratings continues to view long-term care (LTC) insurance as one of the riskiest products offered by U.S. life insurers.

Our view is underscored by Prudential's recent announcement that it will discontinue offering individual LTC policies at the end of this month. Prudential joins a growing list of large insurers including MetLife that have decided to exit the LTC market.

LTC policies help finance the cost of nursing home, in-home, and assisted-living care.

Pricing and management of the LTC product has proved challenging and the regulatory burden has made it increasingly difficult for insurers to make up for any price error via premium increases. We believe that insurers who were overly optimistic on initial pricing assumptions in LTC policies are now forced to deal with significantly lower returns or losses. That has caused insurers to raise prices on the policies in order to fill the gap. But rate stabilization regulation put in place by a number of states has made it clear to insurers that a solution for underpricing via premium increases will not be easy to develop. Regulation protecting LTC policyholders from unexpected price increases effectively limit the ability of insurers to re-price LTC policies.

In addition to higher than expected claims, historically low interest rates have negatively affected LTC results. We believe the long-tail nature of the product and future renewal premiums make the LTC business more vulnerable to interest-rate risk. Low rates continue to curb investment income needed to help fund LTC benefits.

We believe mispricing of the LTC product will continue to weigh on life insurers' earnings and capital, but we note that the current in-force individual LTC business accounts for less than 2 percent of industry reserves and premiums.

Additional information is available on fitchratings.com

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at fitchratings.com. All opinions expressed are those of Fitch Ratings.

((Comments on this story may be sent to [email protected]))