The current state of the LTCI industry: Three is the magic number

By Stephen D. Forman (LTCA)

Long Term Care Associates, Inc.

For now, we live in the time of the shakeout: there remains somewhere between 20 - 40 LTCI carriers.

The rule of three and four

One of the inexorable truths of a free-market economy is the rule of three and four, first outlined in 1976, and further polished in 2002 after gathering data on over 200 industries. It's a simple observation: the most efficient market is one with three competitors (each a full-line generalist), where their market shares comprise 40 percent, 20 percent and 10 percent respectively. The remaining market-share is made up of specialists (in either product type or market demographic).

A market such as this is highly stable, but how did we get here? With surprising regularity, every industry exhibits shakeouts of weaker competitors. Without re-capping the entire theses (both versions are highly readable and each a compelling read), certain conditions encourage a faster shakeout.

For instance, an expanding market, and one in which the top two competitors hold roughly the same market-share — both criteria that exist in LTCI at present. The authors would not have us cry a tear for Prudential, "Common sense says, if you cannot be a leader in a product market sector, cash out as soon as practical. Take your writeoff. Take your tax loss. Take your cash value. Re-invest in products and markets where you can be a successful leader."

The dead horse

If there's one dead horse I've been beating for years, it's how over-rated ratings are. Prudential's exit makes my point yet again: every major carrier who's voluntarily quit the business over the last 10 years was A rated right up until the hour they vanished: CNA (A, 10/03/03) LBL (A+, 10/31/05) GALIC (A, 12/16/09) Allianz (A, 11/13/09) MetLife (A+, 12/30/10) Prudential (A+, 3/30/12) Unum (A-, Q1, 2012).

What good is an A rating if the company is not committed? What good is an A rating if it doesn't distinguish for the client who will and won't raise rates? The AM Best ratings foretell none of that.

Furthermore, I can offer up the name of an E rated carrier who continues to pay more claims (over $240 million per year and over $2 billion total) than most of the names on the preceding list, with little danger of stopping. Even so, many of you know AM Best is the only ratings agency I trust. After the Senate excoriated Moody's and Standard & Poor's for triggering the Wall Street collapse, I don't give them much credence. (The two agencies accepted lucrative fees in exchange for giving AAA status to junk-worthy investments. When they finally revised their ratings on downwards on a mass-scale, it triggered the collapse.)

So if we can't go by ratings, is there any sign we can look to which alerts us that a carrier is about to pull out? Tragically, every company is in it, right up until the day they're not. Prudential was invested right up until the end, pulling out just weeks after National LTC Director Roy Gosselin gave an inspiring presentation to distribution on his vision for 2012 (LTCA's producers had access to this PowerPoint for almost the entire first quarter of 2012).

In it, he predicted increasing product demand, and the further flushing of smaller carriers (irony or foreshadowing?). His remarks about Prudential's future included the usual buzzwords around "controlled growth" and "quality business," while pinning its hopes on "innovative" offerings such as Evolution and GPO. The only other strategies outlined for the year (beyond rate actions) were improved customer and agent service, increased emphasis on Evolution marketing, and a stated desire to increase group takeovers vacated by John Hancock and MetLife.

Between then and their pullout, Pru announced what they considered an industry first (they were wrong): A major alliance with national juggernaut Univita to offer their policyholders an exclusive new "immediate benefit.”

I suspect this will survive and thrive on the group side, but it was met with almost zero fanfare on the individual side.

In the history of LTCI exits, it's not at all uncommon for a carrier to unveil a brand-new marketing initiative one day, then pull up their stakes and leave town like the circus in a cloud of dust the next.

What have you done for me lately?

There's one other lesson we can take away from Prudential's departure. It's a bit nerve wracking to speculate, but I've often preached that any particular LTCI carrier is only one product series away from calamity. It didn't use to be this risky — in the past, when interest rates were flush, when we were ignorantly blissful of morbidity and mortality studies, and our policyholder claims were still years away, there was a luxury for being experimental.

Nowadays, the carriers who've exited the market have one thing in common: their last product out was a consensus flop. Take CNA's Independence, LBL's SeniorLinc Premier, Allianz's GenPro-II, Great American's FlexBenefitLTC, MetLife's LifeStageAdvantage, Prudential's Evolution ... each failed to establish itself in its own way, and each sunk its carrier like an anchor.

I'm not saying the products were bad — not at all. I'm merely saying they failed to thrive, to borrow a phrase from medicine. This is a serious lesson for the carriers who remain, who must balance the desire to compete and innovate, with the risk of filing an Evolution or LifeStage Advantage that no agent can be bothered to spreadsheet.

The rule of three speaks to this, in fact, and observes exactly the extent to which the no. 3 competitor will become the most innovative, while the leader will assume the role of fast follower.

Beyond thunderdome

For now, we live in the time of the shakeout: there remains somewhere between 20 - 40 LTCI carriers. A casual observation of LTCI market share shows we are nowhere close to the levels of consolidation towards which we are headed, but our industry is not exempt.

Imagine a time in the not-too-distant future when we as agents all represent the few surviving carriers. To a certain degree, that's our life today, is it not? How then will we distinguish ourselves from one another in the eyes of the consumer?

By our service? Ha! We can't all say that. It's time to review the lessons of "Video Killed the Radio Star" and "What's Your Number" to re-instill the notion that if you cannot bring unique value to the sales process, you needn't show up to work in the morning. That's a lesson Prudential realized, and why they cut their losses sooner than later.