Genworth eyes new approach to long-term-care insurance rate hikes

The firm is advocating for incremental changes over double-digit rate hikes after many years. But can this new method catch on?

May 22, 2014 @ 1:00 pm

By Darla Mercado

Long-term care insurance policy rate hikes, Genworth, Prudential, MetLife
+ Zoom

Plenty of industry observers have questioned the staying power of the long-term-care insurance industry, but one insurance company executive believes that his firm may have cracked the code to get carriers selling again.

Tom McInerney, chief executive of Genworth Financial Inc., believes that the key to the sustainability of the long-term-care insurance industry is adopting a methodology that will allow carriers to reassess their LTC insurance assumptions on an annual basis and adjust their premiums accordingly.

The end result? Small single-digit increases to clients' premium costs on a continuing basis as opposed to massive double-digit rate hikes that strike years after customers have purchased their policies.

“Every five years that you wait [to implement a rate increase], the problem doubles,” Mr. McInerney said in an interview with InvestmentNews. “You lose the investment income [as carriers invest premiums they receive], people age and get closer to their claim periods.”

It's easier for an insurer to ask for a 5% rate increase now, Mr. McInerney argues, than it is to wait years until claims come in, see how they measure up to expectations and then hit clients with a rate increase of 50% to 80%.

Naturally, Genworth has a stake in lobbying regulators for a pricing methodology that would make the business more sustainable. The carrier is the largest seller of long-term-care insurance, which brought in $21 million in sales for individual policies during the first quarter of 2014. That's down from $35 million in the year-earlier period. Genworth accounts for 30% to 35% of long-term care insurance premiums across the industry, according to Mr. McInerney.

Still the concept does have critics. Not everyone envisions a smooth transition industrywide to a methodology that would assess and adjust premiums on an annual basis. Jim Glickman, an actuary and CEO of LifeCare Assurance Co., notes state regulators would be hesitant to accept such a change unless premiums can be revised downward when the assumptions call for it.

“There are states that will make it clear that the equitable transaction doesn't go both ways if it makes it easier for companies to ratchet up rates but doesn't allow the consumer the expectation that rates can be ratcheted down,” said Mr. Glickman. There are LTCI products out there that reward customers when policyholder experience is better than forecasted. For instance, mutual insurers offer participating LTCI policies, which pay a dividend to customers.

Historically, long-term-care insurance is a product that's brilliant in theory, but poorly executed by many carriers. Its inception goes back about 40 years, making it a fairly new product compared to the likes of life insurance, which has a lengthy track record of claims experience. If you figure that clients buy their coverage while in their 50s and 60s, it can take well over 20 years for them to start using their policies.

Carriers' biggest error in creating and marketing LTC coverage was the fact that the industry failed to anticipate that clients would live lengthy lives, that many buyers would cling to their coverage and that a long period of plummeting interest rates would make it hard for carriers to profit from LTC insurance sales. It also didn't help that some companies underpriced their coverage in an attempt to bulk up on market share.

To top it off, paying claims has become painful. Some 40% to 60% of each dollar in paid benefits comes from the returns that carriers are making on bonds — which are feeling the pain of depressed interest rates — according to the American Association for Long-Term-Care Insurance.

That harsh reality has led many insurers to flee the industry: MetLife Inc., Unum Group and Prudential Financial Inc. are among those who have vacated the LTCI space. Conseco Senior Health, formerly a subsidiary of CNO Financial Group Inc. and once a major seller of LTCI, has been spun off to an independent trust and placed in run off.

It probably doesn't help that filing a rate increase with state insurance regulators is a drawn-out process that can take a year from start to finish, according to Dawn Helwig, consulting actuary and principal at Milliman Inc.

“Right now, regulators for the most part won't look at a rate increase or give it a lot of credence unless there's enough credible experience,” she said. “Having enough credible experience to make the case that you need the change takes time.”

As a result, insurers have fallen into a pattern of waiting 10 years to establish the experience necessary to fight for the rate increase, Ms. Helwig said. Costs continue to ramp up over that period of time, which then means insurers need to ask for higher rate hikes.

Enter the concept of asking regulators for smaller incremental rate increases while carriers assess their assumptions on a continuing basis.

“No one can predict interest rates for 30 years,” Mr. McInerney told InvestmentNews. “The view is that, like health and auto [coverage], we would look at [assumptions] on a yearly basis and make small, single-digit increases.”

Indeed, Genworth is already testing out that premium increase methodology with a block of its newer business, slugged Choice 2 and 2.1. Starting last September, the carrier began filing rate increases of 6% to 13% on long-term-care policies it issued between 2003 and 2012. Four jurisdictions had signed off on those requested rate hikes as of year-end, and that number grew to 11 states as of the end of the first quarter.

Genworth would not disclose the 11 jurisdictions that granted them the rate increase based on this new methodology.

“Rather than wait until actual loss ratios on Choice 2 and 2.1 policies exceed original assumptions well out into the future, we are asking regulators for smaller increases now based on projected loss ratios,” Mr. McInerney said on the company's first-quarter earnings call.

But can such a shift make the long-term care industry viable if a frequent reassessment of pricing assumptions — and small, palatable rate hikes — becomes a common practice among all carriers?

“To be fair to those companies remaining, because this is a needed product and it's difficult to price, maybe we should treat it more like health care rather than traditional life insurance, as that framework was used to underwrite the policies,” said Michael Gross, a credit analyst at Standard and Poor's Ratings Services.

“There is validity in thinking of it in real-time as we do health care, where prices are reset annually based on the cost of insurance,” he added.

The biggest difficulty in making it a reality is coming up with a simplified approval process that's blessed by regulators and can make it easier for insurers to reassess their need for those small incremental rate increases.

“There's a big advantage to making smaller rate increases more frequently than waiting to take a large rate increase,” said Ms. Helwig. “It would require a mindset change on the regulators' part. Policyholders, agents and companies would all be in favor of this.”

A previous version of this article erroneously stated that CNO Financial Group Inc. has left the LTCI business. Rather, it was a former subsidiary — Conseco Senior Health — which has been spun off to an independent trust and is now in run-off.


What do you think?

View comments

Recommended for you

Sponsored financial news

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

B-D Data Center

Use InvestmentNews' B-D Data Center to find exclusive information and intelligence about the independent broker-dealer industry.

Rank Broker-dealers by

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


Federated's Orlando: The economic and financial midyear outlook

As a country, are we stuck in neutral? Federated's Phil Orlando explains what he believes needs to happen to create an economic surge. (Hint: It rhymes with "crump.")

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

Nationwide's 401(k) record-keeping fees are excessive, lawsuit claims

Plaintiffs claim practice of charging plans a percentage of assets is unreasonable.

Wealth management firms struggle with lower fees, fewer new clients

Advisers in North America earned less from clients last year and saw a decline in average fees, according to a new report by PriceMetrix.

These investors are allowed to put $500K into a Roth IRA at once

The HEART Act permits rolling all or part of life-insurance and combat-related-fatality payouts directly into the tax-free retirement plan, but few take advantage.

Labor's Alexander Acosta and SEC's Jay Clayton tell lawmakers they will work together on fiduciary rule

In separate appearances before Senate panels, the regulators stressed the cooperation that Republican legislators and opponents of the DOL fiduciary rule are demanding.

Brian Block denies cooking the books at Schorsch REIT

Former CFO claims everything he did was 'appropriate' and 'correct.'


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print