After an intense internal review, the nation’s dominant long-term care insurance company has decided to continue selling policies. However, Genworth Financial Inc. is making major changes in the way it plans to manage its future business including asking regulators for smaller but more frequent premium increases on new policies.
Genworth CEO Thomas J. McInerney told institutional investors this morning that long-term care insurance “represents a significant opportunity for us going forward.” However, he said LTC insurance has to be managed more like health insurance than life insurance. He added it would be “impossible to be in this business” if state regulators don’t allow carriers to frequently adjust premiums to reflect projected changes in future risks.
Genworth, which has about 35 percent of the market in an industry that has seen dramatic consolidation in recent years, has already made a number of major changes in the way it sells policies, including imposing much tougher underwriting standards on prospective buyers, raising premiums for women, and limiting new policies to five years or less.
The firm is also aggressively requesting rate hikes for older policies. McInerney says the firm is losing money on many of those policies and even with substantial rate increases it is likely to do no better than break-even. By contrast, Genworth’s goal is to earn a 20 percent return on its newest products.
Rate hikes for some old policies could be as high as 50 percent, while newer policies could see hikes of between 6 and 13 percent. Overall, Genworth is aiming for $250-$300 million in annual premium increases for existing policies through 2017.
In the future, McIenerney wants to change the premium model. Instead of holding rates steady for years and then hitting customers with steep, double-digit increases, he wants regulators to allow modest annual rate hikes. Such increases, which he predicts would be 2-4 percent, would be in line with Medicare premium increases and manageable for most policyholders, he says.
While double-digit rate hikes have been a public relations disaster for the industry, McInerney says only about 5 percent of Genworth customers have given up their policies in the face of those rising costs. About 12 percent reduced benefits rather than pay higher premiums while eight in ten absorbed the higher premiums.
Genworth has had to boost prices and make other changes in response to historically low interest rates that have limited the firm’s investment returns and very low lapse rates by policyholders that have resulted in higher than expected claims.
In an effort to keep premiums affordable, Genworth has also begun to sell short-term policies with low daily benefits and no inflation protection, a step taken by other carriers as well.
Still, he said, Genworth customers will pay between $2,000 and $3,500 this year for typical mid-range policies—well beyond the reach of many working people.
It is hard to overstate the importance of Genworth’s decision. Had it withdrawn from the market, the private long-term care insurance industry would dwindled to a handful of small companies selling to niche markets. The firm’s decision to stay is a vote of confidence for a troubled product. But it is also a reflection of just how hard the free-standing LTC insurance business has become.