Demand for Long-Term Care Products Outpaces Supply

A steady increase in claims and unfavorable experience for long-term care insurers, combined with needed reserve increases, have continued to place pressure on many long-term care insurers' capital and earnings, according to a new A.M. Best report on the segment. General Electric's recent announcement that it will need reserve increases of approximately $15 billion for its long-term care business illustrates the ongoing problems in this segment.

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 insurers away from the market.

"The demand for LTC products likely outpaces supply," said George Hansen, a senior industry research analyst. "Despite the demand, industry premium trends have remained relatively flat over the past 5 years. Insurance companies have been hesitant to write this business due to the performance issues that have plagued the product for years."

The loss ratio for the LTC product segment has consistently exceeded 140 percent in each of the past 5 years, according to the report. During that same period, just one in four companies with more than $1 million of LTC premium have reported a loss ratio below 100 percent.

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 5 years, due to an increasing acknowledgment 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 ..., it is hard to build credible industry data that forms a solid basis for pricing," said Bruno Caron, a financial analyst. "Further, experience emerges over an extensive amount of time before [insurers] can get comfortable with it. The product is currently being tested, while traditional life insurance has been tested over centuries."

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 insurers. 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.

Copyright © 2018 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED.