Low interest rates and a failure to obtain rate hikes on older accounts are just two of the issues hobbling long-term-care insurers, according to a new study by A.M. Best Co. Inc.
Despite the fact that insurance carriers have tightened their lapse-rate assumptions and underwriting for long-term-care insurance, problems related to older books of business continue to have a lingering negative effect, according to the report, “Past Sins, Weak Economy Extent Long-Term Care Writers' Struggle.”
So far, credit ratings have remained stable for large, diversified carriers that sell LTC insurance, at the A+ to A++ range, according to the ratings agency. On the other hand, smaller insurers with a concentration in LTC coverage have seen their ratings steadily migrate downward to the B- and C++ area.
Those companies tend to have a limited access to capital and may have their results dragged down by large, older books of LTC business that have been improperly written and require more reserves, according to A.M. Best. As a result, those companies will continue to need to apply for rate hikes in order to help sustain those books of business and pay claims.
However, insurers can't always count on state insurance regulators to green-light rate increases on older and inaccurately priced books of business, as rate stabilization rules cap how often and how high insurers can raise their LTC rates, A.M. Best noted in the study.
Meanwhile, today's low-interest-rate environment and investment losses are hobbling carriers, as fixed-income investments help cover the cost of long-term-care claims.
Further complicating matters, the LTC business requires large amounts of capital, which puts added pressure on carriers that issue the policies. As a result, a number of companies have playing down their LTC business — as have Unum Group and Allianz Life Insurance Company of North America — or ceasing the generation of new policies.
Among the most famous cases, Conseco Inc. backed away from its problematic LTC business, once known as Conseco Senior Health Insurance Co., in 2008. The parent carrier spun off the block — which was made up of business written in the 1990s — to an independent
trust, giving it a $50 million cash capital infusion and a $125 million 6% senior note maturing in 2013.
A.M. Best expects that a combination of slashed benefits, rate increases and policy forfeitures will be necessary to keep the
trust adequately capitalized over the long term.
Other cases have required regulators to intervene directly, as happened with Joel Ario, Pennsylvania's insurance commissioner, and Penn Treaty Network America Insurance Co. and its sister company American Network Insurance Co. The two carriers were placed in rehabilitation last year after a failed reinsurance treaty left their capital and surplus positions in the red.
