Prudential Latest Insurer to Exit Individual LTC

Prudential Financial Inc. is the latest of several big-name U.S. life insurers to announce it's stopping sales of long-term care insurance to individuals.

Prudential Group Insurance (NYSE: PRU) said it will focus only on group long-term care insurance. The second-biggest U.S. life insurer said it will honor existing individual LTC policies and the terms of these contracts, which are guaranteed renewable, won't change.

The current low interest rates, as well as uncertainty around interest rates in the future, were both factors in deciding to exit the individual LTC insurance market, said Sheila Bridgeforth, a spokeswoman for Prudential.

As long as premiums are paid on time, and benefits aren't exhausted, coverage will remain in place, but premiums can be changed subject to regulatory approval, Prudential said. New customers can submit applications through March 30 but any applications after that date won't be processed, Bridgeforth said.

In November 2010, MetLife Inc. (NYSE: MET) said it would stop selling individual LTC insurance coverage (Best's News Service, Nov. 11, 2010). In February 2011, Berkshire Life Insurance Company of America, a unit of Guardian Life Insurance Company of America, said it was halting sales of its LTC product by the end of that year (Best's New Service, Feb. 7, 2011) and Allianz Life decided to stop selling stand-alone LTC insurance products in November 2009 (Best's New Service, Oct. 12, 2010). Unum Group (NYSE: UNM) last month said it would discontinue new group LTC sales (Best's News Service, Feb. 7, 2012).

"People are holding on to their policies longer than companies expected and companies did not anticipate interest rates would be this low when they priced their older products," said Carl Austin, assistant vice president at A.M. Best Co., noting LTC is a lapse-supported business. Business written in recent years can't have rate increases put in, due to the National Association of Insurance Commissioners'Rate Stabilization Act of 2000, which "makes it tougher to recover from a pricing error," Austin said, noting rates are "much higher" today than 10 years ago.

Jesse Slome, executive director of the American Association for Long Term Care Insurance, said low interest rates are the biggest culprits. About 40% to 60% of the premium dollars an insurance company expects to accumulate to pay future claims comes from investment returns, Slome said.

When a company's policy pricing assumed a 4% to 6% return but actual returns are significantly lower, "the financial pressure is enormous," and it becomes a "downward spiral" when the Federal Reserve signals no intent to increase rates for a couple years, Slome said.

At year-end 2011, Prudential had 85,730 policies in force in the individual LTC insurance business, which were generating $201 million in annualized premium, Bridgeforth said. For 2011, Prudential ranked fifth in annualized sales premium and 13th in annualized in force premium, she said, citing LIMRA's survey on individual LTC insurance.

From a revenue standpoint, individual LTC isn't a big part of Prudential's overall business, Bridgeforth said.

The average yearly premium on an individual LTC policy is about $1,800 a year for a single, and about $2,400 a year for a couple, Slome said. About 8 million Americans have some form of private LTC insurance, and the "viable" market for private LTC is about 18 million, he said.

A problem for insurers is it's not easy to get rate increases approved by regulators on older blocks, particularly in some states, Austin said. It creates bad press "if companies are known to be going after 40% rate increases to seniors on fixed incomes."

The policies needing the largest rate increases are those older blocks of business with inflation riders and/or very rich in benefits, Austin said, noting people who drop their policy due to price will have a difficult time finding comparable replacement.

Policies that include 5% compound inflation growth are no longer sustainable when investment returns are 1%, Slome said.

Meanwhile, the federal CLASS Act, which would have created a federal LTC program, was shelved because neither political party is looking to address "the financial tsunami" called LTC that's approaching, Slome said. Insurers aren't required to sell LTC insurance, Slome said.

According to industry research organization LIMRA, new annualized premium for individual LTC in 2011 rose 4% from 2010 to $546 million. About 230,000 Americans bought individual LTC insurance, which was 2% fewer buyers than 2010. LIMRA estimates that 7 million-plus Americans have stand-alone LTC insurance, with a majority, roughly two out of three, having individual coverage.

The top five individual LTC insurance carriers in 2011, based on in-force business, in alphabetical order, were Bankers Life And Casualty, Genworth Financial, John Hancock Financial, MetLife companies and Transamerica Long Term Care, according to LIMRA.

(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])