By Mark Miller
CHICAGO, Aug 15 (Reuters) - When Genworth Financial talks, people listen - especially when the subject is the long-term care insurance business.
Genworth is one of two very large players left in the industry; the other is John Hancock. Each provides long-term care insurance to four times as many people as are covered by the next-largest competitors, according to the American Association for Long Term Care Insurance (AALTCI).
Indeed, the field has winnowed dramatically over the past couple of years, with major players like Metlife, Prudential Financial, Unum Group and Allianz no longer writing new policies.
Right now, Genworth is sending this message: Long-term care insurance (LTCI) is going to be more expensive, and tougher to get.
Thomas McInerney, the company’s chief executive, told investors recently Genworth is “conducting an intense, very broad and deep review of all aspects of our LTC insurance business.” He said he hoped to improve Genworth’s long-term care insurance business by getting state insurance regulators to approve big rate hikes on old policies written before 2001, and smaller increases on newer policies.
And, he hoped to introduce new policies with higher initial prices and tighter underwriting - meaning, they’ll only take on healthier customers.
Genworth and other LTCI underwriters have already put the brakes on the number of policies they write, as they try to focus on the most profitable business, says Jesse Slome, executive director of AALTCI (). “People assume insurers are interested in writing as many policies as they possibly can, but they really only want relatively healthy people, because the policies are priced for that.”
Some observers worry that Genworth could exit the long-term care insurance business altogether. But a Genworth spokesman said the company is committed to the business, noting the country’s age wave and the increasing strain on Medicaid, where state budgets increasingly are devoted to funding LTC.
Indeed, it’s far more likely the company is trying to set the table for improving business conditions over the next few years, the result of three key factors.
Rising interest rates: Ultra-low interest rates have made it difficult for insurers to make adequate returns on their portfolios, which fund about 60 percent of LTC claims. But with interest rates rising, that problem should ease over the next couple years, and that should contribute to a big positive swing in profits on LTCI.
More realistic lapse rate assumptions: Insurers underwriting LTCI back in the 1980s and 1990s assumed that about four percent of policyholders would let their policies lapse before they ever filed a claim - either voluntarily or “involuntarily” - an industry euphemism for death. In reality, lapse rates have been only one percent.
Policyholders, as it turned out, were smarter than the insurance companies thought. Once you buy one of these policies, it makes sense to hang on to it for dear life. Insurance companies have been forced to pay out more in claims than they expected. But newer policies are being written with more realistic lapse rate assumptions built into pricing from the start.
Rising demand and less competition: The market for long term care insurance can only expand as the baby boom generation ages, and with most other carriers getting out of the business, “fewer companies are competing for it,” says Marc Cohen, chief research and development officer at LifePlans, a consultant to the long-term care industry.
New policies already are 20 percent more expensive this year than in 2012, according to AALTCI. The average annual premium for a traditional LTCI policy covering a 55-year-old couple is $2,580 this year, the group says. And single women now pay 40 percent to 50 percent more than single men due to new gender-based pricing major carriers are rolling out.
“The carriers that are still in the market understand what the real experience has been, and they can price that into their policies,” says Cohen.
If rates jump on a policy you already have, and you can’t afford the increase, consider negotiating a smaller benefit in return for keeping the premium flat. The same strategy can work when shopping for a new policy.
Possible adjustments include a smaller daily benefit, a longer wait before coverage kicks in (the “elimination” period), or a limit on total length of benefit payments.
“It’s never take it or leave it,” Slome says. “Genworth is one of the better ones when it comes to offering options.”
In addition, hybrid life insurance policies that incorporate a long-term care benefit are gaining some traction. Some policies allow policyholders to take partial payments of the death benefit early if they need it to pay for care. Others are life insurance policies with long-term care benefit riders. They can be pricey but cheaper than buying both life insurance and long-term care.
Self-insuring is an option for people with substantial wealth. Actuarial consulting firm Milliman has estimated that in order to have a 95% chance of having sufficient resources to self-fund a long term care need, you should be able to set aside $500,000-$750,000 in retirement assets just for that.