by Louis H. Brownstone
At first, many carriers saw long term care insurance as a terrific marketing opportunity and rushed into the market beginning in 1988 with competitive prices. For years, agents and brokers sold policies with the understanding that the carriers had appropriately priced their products, and that the chances for rate increases were small. However, the industry was a young one, and no one knew for sure whether or not the pricing would prove to be accurate.
The carriers then broadened the appeal of long term care insurance in the mid-1990s by including home health care as a major benefit, with little increase in premium. These benefits were very attractive to consumers, and they eventually led to a large number of home health care claims.
This, in turn, stressed the profitability of long term care insurance products. By the late 1990s, other problems arose, and carriers saw that their pricing assumptions were incorrect for four major reasons:
- Interest rates were well below expectations so that carriers made less gain investing the premiums they received;
- Unlike life insurance, lapse rates were extremely low, creating more future policyholder claim potential;
- Claims were more frequent, with higher costs and of longer duration than expected;
- These factors, in turn, led to higher governmental reserve requirements, tying up assets.
Until now, insurance commissioners have been very resistive of carrier requests for big rate increases because they would impose extreme hardship on senior Americans with limited income and assets. Their emphasis was to protect the consumer, which was the major part of their job. They believed that insurance carriers had created their own problems by underpricing their products in order to sell more. They “made their beds” and needed to sleep in them. Insurance is a gamble, and the carriers have lost, so they said.
But there has been a major change in thinking in the last five years. Insurance commissioners have realized that they need to provide carriers enough flexibility in pricing to enable them to pay future claims. Consumers in turn needed to be confident that their claims would be paid. They would be furious if their thousands of dollars of investment turned out to be wasted.
Insurance commissioners, therefore, needed to grant significant rate increases to protect consumers, and have done so. Because there was such a long period of time in which any rate increases which were granted were small, the rate increases needed now have only become greater as long term care insurance policies have matured.
This has led insurance commissioners to grant one-time rate increases as high as 80% to 95% on major blocs of policies. Carriers have to prove that their requests for rate increases are actually warranted.
In many instances, insurance commissioners are insisting that carriers offer benefit changes which can ameliorate or even prevent any increase in premium. These options can or cannot be acceptable alternatives, depending on the current benefits in a policy..
This discussion should not end without mentioning that the long term care insurance industry has learned a great deal in the last thirty-plus years and that current rates should be far more stable. Hybrid and linked policies often have guaranteed rates, but this may not be such a big point of difference if traditional long term care insurance prices remain stable. Because the hybrid and linked products contain two benefits and the traditional long term care product has only one benefit, the traditional long term care product will probably remain the less expensive alternative.