States have taken steps to limit the drastic rate increases plaguing the long-term-care insurance market, leading some experts to suggest that these insurance policies are worth a second look for financial advisers and consumers.
More than three dozen states have adopted rules that seem to have held down the size and frequency of the increases in annual premiums that insurers have sought to impose on many policyholders.
Rate increases are one of the big reasons advisers and consumers have shied away from purchasing traditional LTC policies, which cover nursing home, assisted living and home health care expenses for older Americans. Rate increases can stick buyers with a higher bill or cause them to lapse their policy if premiums become unaffordable.
Rules issued by the National Association of Insurance Commissioners in 2000, which have been adopted in 41 states, require insurers to price newer policies more conservatively to avoid a surprise increase down the road. The standards, which only apply to individual LTC policies sold in a state after it has adopted the rules, appear to have fostered some stabilization among newer policies.
The average cumulative rate increase since 2001 on policies covered by the rules is nearly half that for uncovered policies — 31% on policies covered by the rules versus 55% on policies that aren't covered, according to national data aggregated by the LTC Shop, an insurance agency specializing in long-term-care insurance. The median increase has also dropped significantly — to 20% from 46%. (The NAIC doesn't track this data.)
Despite the reduction, the possibiilty of rate increases continues to make some advisers wary of the product. Others are optimistic about the growing health of the marketplace.
"Newer policies will be much more stable than older policies from a rate perspective," said Scott Olson, an independent insurance agent. "They're working very well," he said, referring to the state rules.
Many of the
rate increases insurers have imposed are on policies sold in the 1990s, when the LTC industry was relatively nascent, according to experts.
The rate adjustments have been necessary for insurers to overcome adverse effects from policy mispricing, an overestimation of lapse rates and a decade of rock-bottom interest rates.
A
study conducted by Milliman, a consulting firm, found that more than 90% of insurers with long-term-care businesses have sought to increase client premiums. Of those, half imposed an average rate increase of 40% or more. (The study included 26 insurers, representing about three-quarters of the industry's annual premiums.)
The chance of seeing a hike in policy premiums has contributed to a
severe decline in the market for traditional LTC insurance. The industry sold fewer than 70,000 policies last year, a tenth of number it sold roughly 20 years ago, according to the American Association for Long-Term Care Insurance.
Scores of insurers have
exited the business. There used to be more than 100 firms writing new LTC business, but that number has dwindled to roughly a dozen.
The NAIC rules adopted by states try to stave off premium increases partly by going after insurers' profit margins if they seek a rate increase.
Under old rules, insurers were required to meet a "minimum loss ratio requirement" of 60%, meaning that 60% of the premiums policyholders pay had to go toward the payment of claims. The insurer could use the remainder for profit, overhead and distribution costs, for example. In the event of a rate increase, the ratio stayed the same.
The NAIC rules reduced the ratio to 58%, but increased that ratio to 85% if an insurer raises raise rates on a policy — meaning the insurer could pocket much less money.
"This creates a strong disincentive for companies to underprice their products initially simply to gain market share," Mary Beth Senkewicz, formerly deputy insurance commissioner for the Florida Office of Insurance Regulation, said in testimony on the NAIC's behalf before the U.S. Senate in 2009.
Florida, which adopted the NAIC rules in 2003, "experienced a decline in rate increases," Ms. Senkewicz said in her testimony. According to LTC Shop data, 91% of the rate increases experienced in Florida have been on policies that were sold before the state rules were implemented.
One other effect of the NAIC rules: New LTC policies must include all prior rate increases in their pricing, and provide a 10% pricing "cushion." That means new policies will be more expensive than older policies but less susceptible to a rate increase, experts said.
'CLIMATE CHANGE'
Jesse Slome, executive director of the
American Association for Long-Term Care Insurance, said that new policies priced today have "almost zero chance of having a rate increase," but added that that hasn't done much to sway public opinion about the products.
"This is like climate change," Mr. Slome said. "Ninety-nine percent of scientists have said it's impacted by man, and still [a large portion] of the population doesn't believe it."
Thomas Henske, a partner at Lenox Advisors Inc., said rate stabilization doesn't factor much into his decision-making around traditional LTC insurance because the possibility of premiums going up even a little bit could still pose a liability from a client relationship standpoint.
"If the premium goes up 1%, they're not happy," he said.
Genworth Financial Inc., the largest LTC insurer by number of policyholders covered, said it is currently working with regulators to improve further on existing re-rating rules.
The company is seeking changes "similar to the way home, auto and health insurance policies are rated," said spokeswoman Julie Westermann. The intent is to foster "smaller, more frequent changes — whether increases or decreases — as needed in order to reduce the likelihood of a policyholder experiencing a significant rate increase after several years of level premiums," she said.
