We May Be About To See A Big Change In How Long-Term Care Insurance Is Priced

The way you pay for long-term care insurance policies may be about to change in a big way.

Genworth, the biggest seller of stand-alone long-term care insurance, is about to ask state insurance regulators for permission to fundamentally revise the way it structures premiums. Instead of holding premiums flat for several years followed by big double-digit rate hikes, it wants to be able to revise premiums annually.

In this design, unfortunately called the Annual Rate Sufficiency Model, buyers of new policies would likely see modest, single-digit rate hikes each year or two. If Genworth thinks it is likely to pay fewer claims than expected or if investment income is higher than projected, consumers might even see small rate reductions in some years.

A Critic of the Existing Model

Genworth CEO Tom McInerney has been a long-time vociferous critic of the existing model, which the industry has been using for decades. He argues that it limits a carrier’s flexibility in designing and pricing products, antagonizes consumers who hate big rate increases, and sours investors who worry about insufficient claim reserves. These problems have helped drive 90 percent of sellers out of the long-term care insurance market over the past decade.

In the coming days, Genworth will formally roll out its new idea to the National Association of Insurance Commissioners at the NIAC’s annual meeting. The firm is also negotiating with individual state regulators for permission to sell a product that it can re-price every year. It is likely to take a couple of years for the NAIC to green light the change, though individual states could act more quickly. Genworth hopes to have a product on the market in at least a few states in early 2018. Annual repricing would apply to new policies only.

Will Consumers Respond?

How would consumers respond to seeing their premiums revised every year? This happens routinely with health, auto, and property and casualty coverage. But not with most term life insurance, where premiums may not change for decades.

 Of course, long-term care insurance is its own creature, and its pricing has led to confusion and anger among many consumers. For years, some brokers told buyers that their premiums would never increase. But in reality, while carriers could not raise rates on individual policies, they could boost prices for an entire class of buyers. They often delayed those rate hikes—or were blocked by state insurance commissioners– for five years or more, until policyholders got hammered with increases of 40 percent and up. Last year, some participants in the federal employee program saw their rates double, after a period of seven years with no rate hikes. They were not happy.

Perhaps it isn’t surprising that in a recent industry survey, 71 percent of long-term care insurance buyers said they preferred “small increases very few years,”  while only 2 percent liked “large increases infrequently.”

What would the change mean for consumers? Genworth says that in one scenario it modeled, initial premiums would be about 10 percent lower than they are today and that over 35 years, a buyer would pay about 17 percent less.

Why Change?

Why would an insurance company propose a pricing model that might bring in fewer premium dollars per buyer over time? It would allow carriers to more closely match prices to claims experience and interest rates, and adjust policies as necessary (and through a far simpler regulatory process). It could generate more income in the early years which could produce more investment income, assuming interest rates finally return to historic levels. And lower initial premiums might attract more, somewhat younger, buyers.

It is not news that the stand-alone long-term care insurance business has struggled. The number of firms selling policies has dropped from over a hundred to barely a dozen. Genworth, the biggest player, recently announced it was selling itself to a Chinese investor. Annual industry-wide sales have plummeted from more than 700,000 policies a decade ago to about 100,000 last year. Because of buyer resistance to steep premiums (the average in 2015 was $2,700), carriers are increasingly selling lower-cost, short-term care policies or combination products that link long-term care with whole life insurance or annuities.

Insurance companies need to do something to fix their business model. We may be about to see if Genworth’s plan to change the way premiums are priced will help both carriers and consumers.

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