Virginians face another round of rate hikes for long-term care insurance

Since the start of this year, nearly 63,000 have already experienced that - in some cases for the second time in just the past two to five years, a Richmond Times-Dispatch review of thousands of pages of regulatory filings found.

For decades, insurers have guessed wrong about how many policyholders will end up making claims for nursing home or other long-term care and how long they'll need it. As a result, insurers have asked state regulators for - and generally won - large increases in the premiums they bill.

They've been stung, too, when the bonds, mortgages and stock didn't yield as much as first planned.

And while many policies are still profitable - in some cases, with claims amounting to only several cents for every dollar of premium payments they take in, every time insurers look at claims trends, the prospects a decade or two down the line look ever more grim.

The basic idea of long-term care, like life insurance, is that investing revenue from early premium payments when claims are relatively small will build up reserves as policyholders age and demands for benefits roll in.

Twenty different companies have requests pending with the State Corporation Commission's Bureau of Insurance for increases on 35 different sets of coverage, seeking increases of as much as 404%.

If the Bureau approves the request for the 404% increase, some 1,300 people who bought long- term care insurance as an employee benefit under group plans CNA Insurance sold to large employers, including Capital One, the Navy Exchange Service and Fairfax County Schools, will see their annual premiums rise from $1,249 on average to $6,298.

They're hit especially hard because they bought coverage promising automatic increases in benefits, to keep pace with rising prices of nursing home and other long-term care.

But even those who opted to go without that protection from their group plan coverage could see increases of 151%, boosting their annual premiums from $821 to $2,069.

CNA sold the policies from 1988 to 2011, but as other insurers asked for, and received, big bumps in their premium rates, it has never asked for a rate increase.

The company had never filed for a rate increase since it began selling the policies, but in 2015, its projections showed claims were rising faster than it had planned, Louis Scarim, its actuarial consulting director, told the Insurance Bureau.

That year CNA began asking all its state regulators to approve a 95.5% rate increase that year.

"Since that time, however, further deterioration in experience has necessitated the need for additional rate increases," he said.

From 1988 to 2020, the company paid 24 cents in claims for every dollar, some $11.6 million, that its Virginia policyholders have paid. But that percentage, called the loss ratio, jumped from the cumulative total through 2015 of 15% to 67% just for 2020.

The company expects the ratio will have hit 82% in 2021 with claims exceeding premiums by 8% next year, if it doesn't get its rate increase.

If it does, it projects that claims would still exceed premiums in 2030 and then keep rising. At that point the company hopes that the pool of investments it has built up over the decades as its reserves and capital will be enough to cover claims going forward.

That points to one of the main issues that regulators like Commissioner of Insurance Scott White must think about, since if a long-term care insurer can't build large enough reserves and capital, the company would not have the money to pay policyholders' claims.

Regulators like White and the companies themselves agree the companies need increases, though that can be less than they first floated with regulators when testing the waters, because what really worries regulators like White is what would happen if one of the companies goes bust.

Two firms, Penn Treaty and American Network Insurance, did just that in 2017. That means that the guaranty funds that all insurers pay into had to step in to handle claims.

And that, White says, has a real consequence for policyholders. The guaranty funds cap benefits at $300,000.

But paying for long-term care can blast right through a cap like that, White said.

"There can still be a lot of value in a policy," he said.

Many policyholders feel that way, he noted.

In fact, one of the strains many insurers report is that the number of policyholders who decide to stop paying premiums and let their coverage lapse is less than they had expected. That's a strain because insurers can keep the premiums already paid for a lapsed policy, but are no longer on the hook for future claims.

Long-term care policies can offer rich benefits, after all - like the up to the $15,000 a month that United of Omaha Mutual promises for an unlimited period of time, along with an option that benefit payment caps will rise with inflation at as much as a 5% compound rate.

That can easily blast through a cap. The average cost of a private room in a Richmond-area nursing home is nearly $117,000 annually, according to the American Council on Aging.

Insurers have pretty much stopped selling policies that generous - United of Omaha's was on the market for just six years, until 2015.

It had only seen one claim, for $1,842, in Virginia by that time.

But looking ahead, as United of Omaha prepared its already 196-page case for an average rate increase of 101%, its analysis of trends in how sick its policyholders were getting - about 10% more than it had thought - and at how long they were living, with death rates about 10% less than it had expected, spelled a fast-evolving financial squeeze, according to the calculations of its in-house actuary, Jeff LaFond.

On top of that, its average return on investments was 0.25 percentage points less than it had planned. The percentage of policyholders dropping their coverage before holding it long enough to accumulate some cash value that could be returned to them was also about 0.25 percentage points lower, which meant one source of funds would not be as large.

For policies that could see claims well into the 2070s, and that likely won't peak until the early 2040s - a quarter century after United of Omaha stopped selling them, those missed expectations are a big deal. At that point, claims will be running eight times premium income.

"Premium rate increases and associated benefit reductions on our long-term care insurance policies are critical to the business," Richmond-based Genworth Financial Inc. told investors in a filing with the U.S. Securities and Exchange Commission.

Last year, regulators in several states approved some $830 million worth of premium increases - including the average 61% bump Virginia approved for the company's PCS II policies, held by some 11,430 Virginians.

Genworth stopped selling these, an early effort to rein in unexpectedly soaring claims costs, in 2001. Unlike its early policies, which offered generous lifetime benefits, an option more than half those policyholders chose, Genworth priced PCS II in a way that halved that percentage.

A later policy, Choice II, which the company launched in 2003 when new regulatory standards took effort, was able to cut the percentage of policyholders opting for a lifetime benefit to 11%, but the pressure didn't abate.

One reason for that was another major driver of the squeeze that hit most long-term care insurers: coverage that promised protection against inflation.

At Genworth, an option that said policy benefits would rise at a 5% compound rate became especially popular with a series of different policies on offer from 1997 to 2013. Half of the people who bought Choice II policies opted for that inflation protection, but what they paid doesn't look like it will be enough to cover costs going forward. Genworth stopped selling these policies in 2012.

For the 17,696 Virginians who have this coverage, rising claims cost trends drove a 29% average rate increase in 2016 and a 33.9% increase in 2019.

Last year the commission approved a 39.9% increase after the company agreed to reduce its original proposed increase of 80.9%.

When Genworth filed its rate request in late 2020, it reported it paid 38 cents in claims for every premium dollar it earned in 2019. If it had received the 80.9% increase it first sought, it could have kept that claims-to-premium ratio going forward to 2079 to 99 cents on the dollar. Over the life of the coverage from 2003 that would have meant it paid out 67 cents for every dollar received.

The increase it got meant, at least for current projections, that it will pay $1.39 in claims for every $1 in premiums going forward and for the life of the policies, a cumulative total of 76 cents. The standard under Virginia's administrative code is 58 cents.

Genworth is expecting it will need to ask for still more premium rate increases in the future, it said in its SEC filing. The company's basic goal, its executives have said several times, is to break even on its current long-term care policies, as it focuses on new services and possibly a new approach to long-term care insurance to help people manage such needs.

Like other insurers proposing big rate increases, Genworth is offering policyholders ways to hold down the size of the increase by agreeing to a smaller daily, monthly or lifetime maximum benefit payment. Another way would be for policyholders to pay out of their pockets for longer periods. Yet another would be for the policyholders to give up some add-ons, such as inflation protection.

For White, at the Bureau of Insurance, that means a hard look to see if those smaller benefits, which would still come at a higher premium, offer something comparable in value to the coverage policyholders thought they were getting when they first signed up for the coverage decades ago.

That combination of rate increases and policyholder agreements to accept smaller benefits, he hopes, is how long-term care insurers and their policyholders will, somewhat painfully, manage to find a path through their financial pressures.

But there's a deeper problem behind that. Medicare doesn't cover long-term care if the care is simply limited to helping people with daily living activities like bathing, dressing, and using the bathroom. Medicaid will pay for some, depending on their income and assets.

"You know, only about 7% of people have long-term care insurance," he said. But a far larger proportion will eventually need to find a way to pay for care.