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Long Term Care Insurance is struggling to survive

Long-term care insurance, a product once seen as an obvious purchase for aging Americans, is under extreme pressure in its current form as the economics become increasingly difficult for underwriters.

Insurers like Genworth Financial Inc. and Manulife Financial Corp.’s John Hancock, which dominate the market, are under pressure as a result. Even as they generate revenue from new policies, they face losses from books of older business, plus headwinds from a new competing government program.

“Most people don’t need LTC until they’re quite old, and many don’t need it even then. This requires that you either buy it when you’re very young and be willing to wait a long time before it pays off, or wait until you’re likely to need it and pay an unaffordable premium,” said Steven Weisbart, chief economist of the Insurance Information Institute.”
“Neither strategy was a marketplace winner.”

Long-term care insurance was envisioned as a safety net, a way for people to guarantee that if they got ill they could enter a nursing home or an assisted living facility, or even bring in a home aid, for as long as they needed.
From the product’s inception, it was mispriced, industry executives say. Insurers underestimated the size, length and volume of claims, the impact of medical cost inflation and the difficulty they would face in selling the product.

That has driven carriers into years of losses, and in some case forced them into huge premium hikes. John Hancock, for one, is trying to push a rate increase that would top 40% for some older policyholders.
The other problem of late has been a low interest rate environment that means underwriters are making less on the premiums they are collecting than they have to pay out. Standard & Poor’s Corp., in a Nov. 15 report, warned the shortfall in investment income could ultimately affect credit ratings.

Top U.S. life insurer MetLife said last week it would exit the LTC business, a surprise to analysts, who were not expecting the company to leave a market where it had held the No. 2 spot as recently as 2007.
“What MetLife does seem to be saying is, even if we doubled the price, this is potentially a negative return on equity business,” said James Ellman, president of San Francisco-based investment manager Seacliff Capital.
Genworth defends

The largest U.S. provider of long-term care insurance, Genworth, actually saw some improvements in the last quarter. Long-term care products made up 40% of the operating income in its retirement and protection business, larger than any other line.
Genworth executives acknowledge the industry has had economic issues, which they say are largely tied to incorrect assumptions about how many people would hold onto their policies. But they say pricing has been correct for six or seven years now, and the market needs time to mature.

“While you’ve got relatively low consumer and producer adoption, it is a product that has only been around in its current form for 15 years or so,” said Buck Stinson, president of insurance products for Genworth. He estimated there are some 7 million to 8 million policies in force across the industry.

Mr. Stinson said the business was stabilizing before the financial crisis, but a low interest rate environment and persistent high losses have forced some insurers to go back to regulators for rate hikes to cover historical losses.

“My expectation going forward would be when you kind of flush this through, and you have a reemergence of five or six companies selling this product with limited rate increases, that stability will come back,” Mr. Stinson said.

The other major player in the business is John Hancock, which recently slashed its 2011 sales plan for long-term care as parent Manulife Financial moved to put its money into more productive businesses. A John Hancock spokeswoman said the firm has no plans to exit the business.

Both also face the competitive risk from the CLASS Program, a part of the health care reform bill passed earlier this year that creates a voluntary long-term care insurance program from 2012. While the coverage level is lower than most private LTC programs, the cost will also be less.

Regardless of the carriers’ optimism, Seacliff’s Mr. Ellman said the long-term care market would only turn around if regulators approved premium hikes, interest rates rose and the industry escaped any impact from the CLASS program.
But the current environment, he said, does not support any of those things happening.

“First rule when you’re in a hole is, stop digging,” he said.

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