Is Long-Term Care Insurance Dying?

Poor results in the long-term care insurance sector have led many providers to exit the market, leaving its future uncertain, Moody’s Investors Service says.

Moody’s report, “Long-Term Care Insurance: Sector Profile,” says despite the need for non-medical coverage by an aging population, long-term care insurance’s future is in question because of persistent losses and a challenging operating environment.

“Key credit considerations for the sector are the relative newness of long-term care insurance, and the long-tailed and complex product structure, which make it difficult to price the product profitably and to reserve for,” says Laura Bazer, Moody’s vice president and author of the report.

The industry’s relatively limited claims experience, along with significant benefit options and long policy horizons, have been key challenges for providers since the introduction of the product in the 1980s, she says.

Mispriced blocks of older, legacy business have led to recent reserve increases, causing sizable losses for some providers in the past two years. The benefits under early policies were often too generous relative to factors such as actual benefit utilization rates and lapses, according to Moody’s.

“While recent hefty reserve and rate increases could improve the profitability of legacy blocks, or at least stem losses, persistent low interest rates and anti-selection could confound the remediation process,” Bazer says.

New, better designed and priced products seek to reduce risks for insurers, with changes including more restricted benefits and payout periods, as well as “combination” policies that offer long-term care with a life insurance policy or an annuity contract.

Nevertheless, Moody’s believes potential buyers may balk at fewer benefits and higher rates, and sales could go down.

Bazer thinks current price hikes will help insurers for the time being, but senior citizens on fixed incomes form a highly sensitive constituency, and regulators could therefore reject or limit new rate requests.

Additionally, the exit or retreat of five firms from the market since 2010 leaves only one dominant player. Thus, the sustainability of sales volumes and the viability of the market overall, is in question, Moody’s says.

MetLife and CUNA Mutual stopped selling LTC in 2010. In 2011, CNA and Berkshire pulled out. This year, Prudential stopped selling individual to focus on group; Unum stopped selling group and had previously pulled out of individual sales.