No one wants to receive phone calls from their clients upset about increases in their premium. Given the controversial history of premium increases of in-force blocks of traditional long-term care products, many advisors avoid offering them to their clients.
A closer examination of why old blocks of LTC business are so far underwater can address the client’s concern about the chance of a future rate increase when you place a traditional LTC policy today.
Understanding the “Why”
Relative to other types of insurance, LTC is still considered new coverage. Though the first plans appeared nearly 50 years ago, their underwriting track record is only now becoming clear. Until the last ten years, carriers had to make educated guesses about how to price the product. The key factors to be considered were and still are persistency, claims, and interest rate assumptions but there was no historical data. As you might imagine, most of their assumptions were wrong.
Persistency: Every product has an “assumed lapse ratio” built into it. That tells you what to expect regarding the number of policies issued that should still be in force at the “normal” time of claim. Early estimates pegged the lapse ratio at around 7% to 9%. It wasn’t determined until after 30 years that only around 1% of policies were lapsing. Not only were clients keeping policies, but most also included unlimited benefit plans with a 5% compound inflation feature. With a lower-than-expected lapse ratio, carriers were losing big time.
Claims: Without a block of claims to analyze, assumptions on what caused claims, and the “normal” time of claim, resulted in pricing that was way off. Advances in medical science and therapy keep people alive longer, leading to an increase in chronic conditions that make them ADL impaired and in need of constant care. Also, cognitive impairment has accelerated, making it one of the top causes of claims. Underestimating the claims experience of LTC insurance compounded carrier losses.
Interest rate assumptions: For a period of 25 years following the introduction of LTC insurance, investment returns were through the roof. Bond yields were in double digits, and the stock market of the 1980s and 1990s was skyrocketing. As conservative as carriers tend to be, their pricing assumptions were based on expectations of tremendous earnings growth, which could be plowed into surplus to meet future claims. But, about the time those 10- to 20-year bond instruments were maturing, the financial crisis hit. From that point forward, the carriers took a beating from shrinking yields and poor stock market returns.
When you add higher than expected persistency, poor claims experience, and disastrous interest rate assumptions, you can understand why the carriers had to escalate in-force premiums.
The Chances of Calls from Irate LTC Policyholders Going Forward
The LTC Carriers offering these products are aware of the past and the increased costs to cover the protection need so you can feel confident that rates will stay more stable. While that is no guarantee of no future in-force rate increase, clients will be more comfortable with the changes once they are aware how premiums work.
If traditional LTC is the right solution based on the collaborative conversation you have with your clients, you can feel much more confident using this information in explaining the possibility of future rate increases. Our team is available for joint advisor/client calls to assist you with your client conversation.
— By Ed Stone, LTC, DI & Annuity Specialist