Debunking Long-Term Care Insurance Myths
Durham, NC | February 2024: At a recent webinar, several long-term care insurance experts gathered to discuss and address some of the statements made in a recent New York Times piece called “Dying Broke: Why Long-Term Care Insurance Falls Short for So Many”, which chronicled the financial and emotional toll of being a family caregiver.
"As participants in the long-term care industry, including actuaries, consultants and people interested in this subject, it’s important we share our thoughts and opinions on some of the issues raised in the article,” said Robert Eaton, industry consulting actuary.
The remainder of this article summarizes the panelists’ discussion regarding four “myths” presented in the New York Times article. The statements expressed by each individual are their personal views and do not represent the views of their respective employers.
“Long term care insurance rate hikes were driven by insurers underestimating how much care insureds would need, how long they would live, and how much care would cost.”
According to Vince Bodnar, Chief Actuary at TCARE, this assertion doesn’t consider several factors:
Back in the late 80’s, and early 90’s, interest rates were very high. As you know, this is a long-duration product that’s very sensitive to interest rates and interest rate assumptions. It was not uncommon to assume that long-term interest rates would be seven or eight percent, back when a lot of these products were originally priced. When interest rates dropped like they did, that was a big contributor to the need for premium rate increases.
As far as life expectancy, certainly, people are living longer now than when we priced the products back in the 90's. But, in addition to that, we had assumed insureds would lapse their coverage at a higher rate than what we’re seeing today. We thought lapse rates would be in the mid-single digits, but they turned out to be one percent per year and even less in a lot of instances.
So, the frequency of usage wasn’t as big of a miss as you might think based on the article. The other two factors (interest rate and lapse rate) were more at play.
Stephanie Moench, Principal at Oliver Wyman, also points to life expectancy and reduced lapses as a catalyst for premium increases:
The fact that policyholder persistency was underestimated created a much larger population that would need care than originally anticipated. The interrelationship between persistency and morbidity is important in terms of the magnitude of the potential claim cost expectation.
Clark Heitkamp, Senior Consulting Actuary at Risk Strategies Consulting, points to changes in long-term care settings as another driver of experience deviation:
Care setting has shifted from primarily nursing home coverage to assisted living facility and home care coverage. Now, people are at the age where they really need care, and they want that care at home. And so, just the whole dynamic of care has changed.
“Insurers experienced a brief profitable surge during the COVID pandemic.”
This is not fully accurate, according to Moench:
Unfortunately, COVID-19 resulted in high mortality rates in older populations. This higher mortality, coupled with fewer individuals going on claim because people didn’t want to put their loved ones in nursing homes, had a positive financial impact for long-term care insurers given the way this insurance works. However, claim experience has mostly reverted to pre-pandemic levels. The article states that insurers saw $1.1 billion in profits in 2020 and 2021 combined, but, fails to point out that when aggregated with the 2019 and 2022 earnings that are also referenced in the article, the industry still lost $1.5 billion dollars from 2019-2022.
While 2020 into 2021 might have seen some positive financial news for the LTCI industry, in no way did it put a dent in the overall experience over the decades.
“Long-Term Care insurance is “one of the riskiest in our universe.”
Moench agrees that long-term care insurance is risky but feels that calling it the “riskiest in the universe” is hyperbolic and may be biased based on the industry’s challenging past:
It isn’t a secret that this industry has faced a lot of challenges, including a perfect storm of assumption deterioration, competition that reduced inherent conservatism, and care setting changes. There are multiple actuarial risks that are inherent to this product, including morbidity, interest, and persistency. These risks are complex and inter-related. Small changes in these assumptions can have a very meaningful impact on reserve and profitability levels. This, coupled with the long time horizon between when policies are issued and when benefits are paid, exposes carriers to a lot of downside risk. When you’re pricing these products, you’re making assumptions about what will happen in 20, 30, or 40 years in the future. This long-time horizon creates uncertainty, and uncertainty creates risk. But, we’ve learned a lot of lessons from the historical challenges and the product design has evolved to be more ‘risk savvy’ with assumptions that reflect our past experience.
The products sold today have a lot less inherent risk. They’re priced more conservatively, and with all the experience we have, we have reduced the risk exposure to an insurance company.
"Insurers have tightened their belts, and they're denying more and more claims.”This is not fully accurate, according to Moench:
According to Bodnar, this is very misleading:
There are just more claims. People who bought these policies 30 years ago are at an age where they’re submitting claims, so you have a higher volume. Yes, insurers are going to deny some claims because the policy may not cover the insured’s situation, but that doesn’t stop people from filing. Certainly, if you don’t meet the criteria to trigger a benefit, the company likely won’t approve your claim. If insurance companies just paid erroneous claims, that would cause more of the type of problems we are trying to avoid.
Moench adds that long-term care insurance companies have also stepped up their fraud prevention game:
There’s more rigor and more structure to the process, and hopefully that’s a positive thing for the industry and for those who have claims in the future.
“Financial problems forced high-profile carriers to drastically revise their policy terms and premiums or go into insolvency.”
Heitkamp calls this “a scare tactic”:
This really can’t happen in most situations. The insurance company can increase premium rates, with regulatory approval, and can reduce benefits, but only at the policyholder's option, and this is usually done as an offset to a premium rate increase. The only time a policyholder’s benefits could arbitrarily be reduced is if the long-term care insurance company went into rehabilitation or liquidation.
Eaton adds that rate increases, while painful, are a sign of the importance of long-term care insurance:
People continue to pay the premium for this product because they expect either they might need to use it, or they want peace of mind. They want the risk removed from their life if they do need it. It’s a valuable product and a real source of financial wellbeing.