Health of long-term-care insurance business questionable: Moody's

Re-pricing of products may not be enough to offset onerous in-force contracts

Sep 19, 2012 @ 4:15 pm

By Darla Mercado

LTC, moody's
+ Zoom

Long-term-care insurance continues facing pressure on several fronts, particularly as the market consolidates and payouts for in-force contracts rise.

The field of LTCI providers is shrinking as companies exit the business or limit their sales. Of the 15 companies that generated the most statutory earned premiums for LTCI in 2010, five either no longer sell the product or have curbed sales. The list includes John Hancock Life Insurance Co., MetLife Inc., Unum Group, CNO Financial Group Inc. and Prudential Financial Inc.

MetLife, CNO, Unum and Prudential exited the business. Meanwhile, the second-largest-player, John Hancock, curbed sales through price increases and then last month released an LTCI product with an investment component that shares more risk with the consumer.

According to a recent report from Moody's Investors Service, the group of 15 accounted for 85% to 90% of the industry's total individual and group LTCI business in 2011, comprising $11 billion in statutory earned premiums and about $70 billion in statutory liabilities.

At the top of the heap, Genworth Financial Inc. remains the biggest seller of LTCI, taking in $2.14 billion in statutory earned premiums for individual and group coverage, Moody's noted, making the carrier “the clear LTC market leader and largest single provider of individual LTC products.”

Having a dominant player in the space may not bode well for the overall industry, however. The ratings agency anticipates limited material appetite for LTCI business at Genworth.

A call and an e-mail on Wednesday to Tom Topinka, a spokesman at Genworth, was not immediately returned.

Fewer companies, low rates hit

What's more, sales across the board likely will take a dive now that there are fewer companies willing to offer the product. Low interest rates also are hurting the product, as 40% to 60% of each dollar in paid benefits comes from returns carriers make on bonds, according to the American Association for Long-Term Care Insurance.

“In terms of the industry having one single player for a large portion of the business, it's a reason we wonder about the future size of the sector,” said Laura Bazer, vice president and senior credit officer at Moody's. “How much more incremental business would one player want to take on in light of so many exiting?”

Certainly, legacy LTCI business puts carriers in a tough spot. Insurers didn't anticipate insureds living for so long or running up such enormous tabs. That's left carriers with a badly underpriced product. And demand is expected to remain high as the people 65 and up face 68% odds that they will become unable to perform at least two activities of daily living or that they will become cognitively impaired, according to data from America's Health Insurance Plans.

At the same time, as companies try to raise premiums to reflect these risks, state insurance regulators have cast a jaundiced eye toward rate hikes on seniors, according to Moody's: 75% of all 2011 individual policies were purchased by clients 55 and older, according to the AALTCI.

Though insurers have been promoting combination products that pair LTCI features and life insurance, Moody's is unsure whether the product ultimately will take off. These offerings have two- to three-year benefit periods and they ultimately require more money upfront, which could make it less attractive for consumers, according to the ratings agency.

“Whether hybrid products meet the needs, because the benefit is limited, is still a question,” Ms. Bazer said.

While conservatively designed policies and more expensive policies could buck up insurer, the in-force blocks will continue to be a drag. “Sizable underpriced blocks of older in-force business continue to exist and may cause earnings troubles for companies in the years to come,” the ratings agency noted in its report.

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