This is the Golden Age of long-term care

By Stephen D. Forman (LTCA)

Long Term Care Associates, Inc.

For those of you who haven't seen Woody Allen's miraculous "Midnight in Paris," I'm about to spoil the takeaway: each era waxes nostalgic about the age before. Finding ourselves jaded and cynical today, we call forth fond remembrances of a golden yesteryear.

Now more than ever, long-term care insurance (LTCI) stakeholders and observers alike are failing to step outside the movie and recognize that today is our Golden Age. It was Pangloss in Voltaire's novel Candide who observed, "Everything is for the best, in this best of all possible worlds." The eternal optimist might have been describing why the present period of inevitable market contraction is a self-leveling mechanism designed to bring equilibrium between buyers and sellers.

The industry's counting problem

The oft-repeated claim that market penetration rests at a paltry 9 percent began as a disingenuous throwaway from studies about LTC financing. A more revealing approach is that taken by my colleague Jesse Slome, of the American Association for Long Term Care Insurance.

He posits that LTCI penetration may be as high as 50 percent. How can this be? Slome deduces that even though the total U.S. population may have reached 310 million, we need only concern ourselves with the viable pool of candidates for our product. Start with the 112 million Americans between ages 40 and 69. Because most of these won't become serious about LTCI planning until their 50s, let's narrow it to 88 million.

But, our market must health qualify, afford the premiums, have assets to protect and be planners. That's a lot of narrowing! Slome takes out 5 percent to 9 percent for health, another 18 percent who are impoverished and another unemployed subset who are disinclined to financial planning: in the end our total market is probably 15 million, of which 10 million policies have been sold, and eight million are in-force (the balance having lapsed or passed away). Note: Other reliable sources put the total number of in-force policyholders lower than Slome, at closer to five million, but these numbers are always tricky to work out.

Too many mouths to feed

What is the "proper" number of LTCI carriers for a market of 15 million? Is it 10, 100 or something in between? Before we let sensational journalists, hand-wringing consumers and doomsday analysts answer that question for us, allow me to inject a little perspective.

Last week, I found myself calming the nerves of a rattled producer with whom I've worked for more than a decade. His knee-jerk reaction to the bevy of seeming bad news was that the number of carriers in the market has shrunk. Really? When I compared the list of carriers my firm represented in 2001 vs. 2012, it turns out we actually represent more carriers today than a decade earlier. I suspect agents feel a sense of uneasiness due to the carriers who have stolen our hearts and skipped town in the intervening years — among them, by the way, some of the loftiest A-rated insurers in the industry. Yet one more reason we can put a nail in the coffin of useless rating agencies.

Our LTCI market puts on about 220,000 new lives per year, worth about $540 million in annualized new business premium. This is spread among no less than 25 carriers, but there are more. The fundamental question: Can a pool of 15 million prospects sustain this many competitors?

Our product is known for unusually high acquisition costs, coupled with a long tail during which claims are paid and profits are recouped. Income is derived from only two sources: premiums and interest. Depending on the age of the applicant, the ratio starts at 50/50, more or less. When interest rates are low, premiums must be increased dramatically. Given these inputs, carriers for whom LTCI is not a core product may soul search periodically whether the opportunity cost of deploying their resources into other product lines isn't too high.
Truly, we live in a golden age

This business goes to the survivors. For the carriers and producers who remain, the world is our oyster. We need only stand before the silver tsunami and wait — which is why sideline watchers may return when the water gets warm. In the meantime, let's rejoice in how far we've come. Whether you are a consumer or producer, there has never been a better age for long-term care insurance than today.
  • The companies selling today have more experience than at any time in history, some nearing 40 years, with all the attendant actuarial and morbidity data that comes with it.

  • Claims paying is at an all-time high ($6.6 billion paid in 2011, to more than 200,000 beneficiaries). Where once it was uncommon for a carrier to pay $1 million a day, there are now several carriers in this elite club.

  • We have access to more benefits and features than ever before (between a plethora of rider options, and new financial vehicles beyond traditional LTCI such as life + LTC and annuity + LTC).

  • Buyers today benefit from a wide range of consumer protections (timely payment of claims, contingent non-forfeiture, third-party review, etc.), including MAE pricing, which extends to the way rate increases are implemented.

  • There are now more than a half dozen carriers offering short-term care, a product expertly designed to address the twin objections of affordability and high declination rate.

  • The CLASS Act is a budget zombie, and has been thoroughly de-funded and disgraced; further, the Affordable Care Act offers up no alternative from the federal or state governments except pressure to trim Medicaid budgets.

  • Partnership programs provide lifetime benefit periods for the price of limited and waive the need to sell the former.

  • Where 5 percent compound inflation protection was once the only (and highly expensive) option, there are now a dozen new, less expensive but no less effective inflation options.

  • The average price paid for a policy is less than ever: In 2002 it was $3,572 a year inflation-adjusted; today's average policyholder pays just $2,309 a year. This drop in prices can be attributed partially to changing ages and benefit structures of the average buyer, but also because rates have not entirely kept pace with the Consumer Price Index.
I've read the words of pessimists on LinkedIn forums who fear the worst, and I've read the same company bulletins as the rest of you. But I also believe today is the Golden Age. We have a tendency to romanticize the past, which is fine if you don't mind dying from a simple infection or undergoing surgery without anesthesia — holy cow!

As in "Midnight in Paris," come live in the present with me, and we'll be just fine.