An unexpected announcement by MetLife that the insurer will exit the long term care insurance market in less than two months stunned an industry that has been forced to endure an escalating series of negative announcements over the last three years. The industry has worked for years to meet the needs of baby boomers crossing over into retirement age, and long term care insurance policy sales should be booming. But instead, decreasing sales, rate increases, blocks of business taken over by state risk pools, and now the sudden departure of one of the leading carriers and brand names for retirement and long term care security has set the industry back.
This storm, brewing for some time, became particularly evident in the last three years through a series of disruptive events emanating from leading long term care insurers. In 2007, John Hancock and Genworth began raising rates by 20 percent on new policies sold. In 2008, Conseco, the Indiana-based insurer and one of the nation's largest sellers of long term care insurance, transferred its long term care policies to a state trust fund in Pennsylvania. It was estimated at the time that the transfer of polices to the Senior Health Insurance Co. of Pennsylvania, a state trust fund, would impact 140,000 policyholders. In September 2010, John Hancock made a stunning announcement that it would increase rates on in-force policies by 40 percent and would suspend group product sales, and in October, Genworth announced that it, too, would again raise rates on at least 26 percent of its in-force business.
And then, a truly unexpected and major blow to the stability of the LTCI market came with the announcement that MetLife would abandon the long term care insurance marketplace effective Dec. 30, 2010.
The domino effect
The common factor for all this action seems to be incorrect pricing on LTCI costs attributed to carriers underestimating the longevity of policyholders and the level of policy persistence. Simply put, long term care insurers underpriced the products, and it is increasingly expensive for carriers to keep policies on the books for longer periods of time at the original price for which they were sold. Solutions to this situation have come in the form of rate increases on new and existing business, abandoning blocks of business and leaving it to the states to take over or, as in the most recent case, exiting the market altogether.
Genworth attributes its rate increases to “persistency, or the number of people who will retain, rather than lapse, their policies over time — leading to higher claims than pricing assumed for these older policies.” Similarly, when John Hancock examined its claims experience between 1990 and 2010, it discovered “unfavorable claims patterns,” according to Marianne Harrison, president of John Hancock Long Term Care.
The carrier discovered that claims had doubled since it last examined its experience in 2006, and that the age group 80 and older increased by a factor of four. The length and severity of claims rose in the same time period, while policy termination decreased. The bottom line is that more people were living longer and using their policies for longer periods of time than had been expected.
“Put simply, more people used the insurance than anticipated, reinforcing the value of the product to policyholders, but creating a pricing issue,” Hancock said in a statement.
These same factors are also true in the case of MetLife’s announcement to leave the market, . In its statement, the carrier indicated a major reason for leaving the market is that more customers are cashing in on their long term care policies at the same time the cost of care is rising.
“While this is a difficult decision, the financial challenges facing the [long term care insurance] industry in the current environment are well-known," said Jodi Anatole, vice president of long term care products for MetLife.
Leaving at the time of greatest need
Of course, the irony of this situation is that MetLife is leaving the market at exactly the time consumers need private market options to help pay for long term care more than ever. Starting in 2011, as many as 10,000 baby boomers a day will start going onto Social Security and Medicare. Those social safety net programs are already under tremendous stress to keep up with the current population’s demands. Combined with a weak economy undermining the availability of tax dollars to sustain them, these programs will start pushing the financial responsibility for long term care back onto individuals and their family members. State Medicaid programs are under enormous stress to keep up, as well, and are cutting budgets, increasing barriers to entry and more frequently emphasizing long term care self-funding. As the economy continues to search for its footing and demand for access to these programs rises, this will be an escalating area of concern for all stakeholders across the country.