Best’s Special Report: Reserve and Rate Increases Pose Challenges for Long-Term Care Writers; Loss Ratio Remains Volatile
Long-term care (LTC) results have been mired in negative sentiment for years, driven by poor performance from inadequate pricing related to factors such as low interest rates and lapse rates, as well as mortality, morbidity and policyholder utilization assumptions. The Best’s Special Report, titled “Long-Term Care Rate Increases Drive Premium, Loss Ratio Remains Volatile,” states that these factors have led to large losses and significant reserve increases on in-force business, and have driven many carriers away from the market.
“The demand for LTC products likely outpaces supply,” said
The loss ratio for the LTC product segment has consistently exceeded 140% in each of the past five years, according to the report. During that same period, just one in four companies with more than
The number of new long-term care policies issued has been on a consistent decline, suggesting that rate increases are a contributor to premium levels. Another factor that translates into higher premiums is the re-pricing of new policies with significantly elevated premium rates. In light of the issues and others surrounding this market segment, LTC insurance is the riskiest product on A.M. Best’s Product Risk Scale.
The ratio of experienced to reported reserves also has been on a steady decline over the past five years, due to an increasing acknowledgement by the industry that its initial pricing assumptions were recognizably worse than anticipated and needed further reserve strengthening. “Given the multiple designs of LTC offerings and the high number of assumptions on which performance and solvability relies on, it is hard to build credible industry data that forms a solid basis for pricing,” said
While regulators have granted sought-after rate increases, which in turn has generated additional market data, predicting future regulatory attitude toward these rate increases is not simple. Although granting rate increases on in-force policies is usually not a popular decision, the alternative could cause solvency issues for certain carriers. This could create serious issues for states, including impacting Medicaid funding and contending with vulnerable individuals not being able to afford appropriate care, despite taking original actions to avoid this issue.
To access the full copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=270763.
Copyright © 2018 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.
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