LTC a risky business for insurers

The inexorable rise in health care costs and worries about increasing longevity have caused consumers and advisers to think twice about long-term-care insurance.

“There’s a need for it in every portfolio or client plan,” said Bernie Petit, the owner of Beacon Financial Solutions Inc.

“However, when I do present it to clients, they see it as too costly,” he said. “They decide to take on the risk themselves.”

The average price for a comprehensive LTC policy is about $1,480 annually for a 55-year-old, according to the American Association for Long-Term Care Insurance. For a couple who are 60, it’s $2,970 a year.

The resistance to the price tag is one factor that has forced many companies to drop LTC products.

In a report this year, Fitch Ratings Ltd. called long-term-care insurance “one of the most risky products sold by U.S. life insurers.”

Negative factors faced by companies include difficulties in underwriting and pricing, reserve and capital requirements, interest rate risk and regulatory uncertainties.

“Given the long-tail nature of the liability, mispricing the LTC products can negatively affect insurers’ earnings and capital for many years,” the Fitch report said.

Fitch cited LIMRA statistics showing that LTC sales reached a high of about $1 billion in 2002 but fell to about $500 million in 2010.

What has caught insurers by surprise is the number of people who continue to maintain old policies.

The so-called lapse rate, or the amount of policyholders who drop coverage, was about 5% in the 1990s and now registers in the 1%-to-2% range, according to Doug Meyer, managing director of insurance at Fitch.

“[Insurers’] claims experience has been much more adverse than expected, and the primary reason for that was lower-than-expected lapses,” he said.

The number of claims being submitted as tens of millions of baby boomers retire also has exceeded expectations.

Allianz Life Insurance Co. of North America, Ameriprise Financial Inc. and MetLife Inc. are among the companies that have stopped selling LTC products. The market exodus, however, may start to slow.

“At this point, most [companies] that plan to exit have already announced it,” Mr. Meyer said.

STAYING THE COURSE

One firm that is staying in the market is Northwestern Mutual Long Term Care Insurance Co.

While witnessing their elderly parents decline, clients also are experiencing “income pressure on their retirement portfolios,” said Steve Sperka, president and chief executive. Many turn to LTC insurance to protect against running out of money when they, in turn, need care.

“We’re seeing a very positive response from our advisers and their clients,” Mr. Sperka said.

“They view it as insurance on their retirement nest egg,” he said. “Long-term-care insurance is a critical part of that financial plan.”

IFP Insurance Group, which is affiliated with Independent Financial Partners, recently put LTC insurance, as well as life insurance, on the platform that it offers to 450 investment advisers.

“It’s an integral part of planning for any family,” said Jayne Alford, managing director of IFP Insurance Group. “We are going to make that a big part of our message.”

“ADDED VALUE”

Even the companies that remain in the market are changing the way they package long-term-care policies. Instead of selling LTC insurance as a stand-alone item, there is a trend toward including it as a rider in life insurance and annuity products.

Those products provide for the death benefit in a life insurance policy to begin paying out to cover a stay in a nursing home.

Including the LTC provision increases a policy premium, but clients think that it is worth the cost, Ms. Alford said.

“A number of customers are seeing that as added value,” she said.

Another change in LTC policies is that insurers no longer are offering an unlimited benefit.

The low-interest-rate environment has made it nearly impossible for companies to afford such terms, Mr. Sperka said.

“It’s almost unavailable in the industry right now,” he said.

Northwestern Mutual, for example, offers coverage for up to six years.

Demographic trends likely will lead to more interest in insuring against long periods of ill health.

The senior population will grow to 71.5 million by 2030, up from 35 million in 2000, according to the American Association for Long-Term Care Insurance.

“People who end up wanting it the most are the people who have gone through the process with their parents,” Mr. Petit said.

The need for LTC insurance will continue to grow, Mr. Meyer said.

“It’s still a fairly untapped market,” he said. “The challenge is that the industry needs to sell it on a profitable basis.”

[email protected] Twitter: @markschoeff