After Thomas J. McInerney took the helm of insurance giant Genworth Financial Inc. last January, he ordered an intensive review of the firm’s long-term care insurance business. Genworth was one of the biggest players in the market, but the industry was struggling and investors unhappy.
In an exclusive interview, McInerney tells Caring for Our Parents about his decision to stay in the business, talks about changes he thinks are essential in the pricing of long-term care insurance, and says is looking at ways to create a joint public/private insurance product where government would assume risk for catastrophic care. McInerney’s interest in such a solution is a major change for Genworth, which in the past had been skeptical of a public/private partnership.
Here is an edited transcript of our interview:
Howard Gleckman: How did your thinking about long-term care insurance evolve as you worked through your internal review?
Tom McInerney: When the board hired me they were very concerned about the long-term care business. It had been a poor performing business for Genworth. Prudential, Metlife, and Unum had recently [gotten] out. Their perspective was: If the top two companies were getting out, why does it make sense for us to be in.
I came with the perspective that it was a challenge business and not performing well. Starting in February, we did a 4-5 month all-hands review of everything. We wanted to be comfortable that we could write the business with acceptable risk and a reasonable return. This is a risky business for an insurance company because morbidity, mortality, interest rate, and lapse risks occur over 20 or 25 years and it is largely unknowable how those risks can change over time.
HG: In the end you decided to stay in.
TM: I had been evolving going back to the summer. The major issue for the industry had been this idea that you would set assumptions and then not necessarily change premiums for the duration. We concluded that if you need a price increase today of 10 percent [to] bring the in-force block back to original expectations, you’d need a 20 percent rate increase if you wait five years. If you wait 10 years, you need a 40 percent increase. If you wait 15 years then you need a 60-80 percent increase. About 15 years ago, the whole industry should have applied for a 10 percent increase, even if they spread it out over a few years.
HG: Is it fair to say that without the ability to adjust premiums every year or two you would exit the business?
TM: Yes. You cannot predict these risks over a long period of time. If you are not able to make these modest corrections, these risks can become unmanageable. If you spread them out, do it frequently enough, and keep the increases to 2-3-4-5 percent, it is manageable.
HG: People are not dropping their policies despite big rate hikes. Why are people paying them?
TM: That’s not a surprise for me. People can get off track by just looking at percentage increases. The actual premium they were paying was $1,000,-$2,000. Over the course of 30 years, the policyholder would pay $60,000 or less. Average nursing home costs are $80,000-a-year. You still have a deal too good to be true when you pay $60,000 for unlimited coverage. It’s well worth the extra premium in the remaining years to keep the unlimited benefit.
HG: Can you imagine any circumstance in which Genworth would get back to offering lifetime policies or even coverage of more than 5 years?
TM: I’m talking to some states about a [model] where Genworth would take a first loss position, [say] 3 or 5 years. Instead of a [resident] not having any coverage, they’d have coverage up to $300,000 or $500,000 and the state would provide the unlimited benefit above that.
The state would collect premiums for [catastrophic coverage] for 20 years or so before going through the first loss. There’s a fairly low probability it would have to pay too many claims, but it’s easier for a government entity to take the tail risk because they don’t have to explain it to investors. A lot of time, investors don’t like companies that have that [unlimited] risk.
It’s a win/win for everybody. Genworth would cover the majority of the claims. It would mean more coverage and a broader [risk] pool. We’d reassure our investors that we don’t have a potential black hole forever. That fund should be more than adequate and [keep] many people from going onto Medicaid.
Genworth would manage the clients, who would be covered for whatever they need. We’ll have consumers, regulators, the states, and Genworth all on the same page because it [will be] in all our interest to manage the risk better.
HG: What would the premium be for this catastrophic coverage: A couple of hundred dollars a year?
TM: On top of $500,000 coverage that’s probably right. The $500,000 covers you for five years so.
HG: Are there other public/private models that could work?
TM: It’s possible that you could have the individual consumer pay out of their own funds up to $150,000 or whatever, and then have the [catastrophic] insurance. The problem is that on average the Baby Boomers only have about $140,000 in [defined contribution retirement plans] and are getting Social Security benefits of $25,000-a-year. Most couldn’t afford to self-insure for $150,000 because they haven’t done a good enough job saving.
Rather than having to put aside $150,000-$300,000, they’d only pay, say, $3,000-a-year in insurance premiums. It seems to me a much better use of funds. It would be in the best interest of the states to have as many of their citizens [buy] private insurance and they’d cover on top of that. There is a big benefit in having more people covered. It will allow you over time to have lower premiums. Then less people ultimately to go on Medicaid.
HG: How to you get people to buy in the first place?
TM: There is a lot of public education that needs to be done.
HG: Would states offer a subsidy to help people purchase?
TM: In theory the answer would be yes. To the extent [people] couldn’t afford the premiums [states] could consider some kind of a subsidy. The other way to go is we would [cover] a lower first position and then have the state come in sooner. That might be a better way for the state to do it. The other idea is perhaps giving either state or federal tax relief for purchasing coverage.
HG: Can you imagine health insurance that includes some long-term care benefit? Is that something you’d be interested in?
TM: We’re not in the health insurance business nor would we want to be in it. [But] partnering with others where we would do the long-term care piece and they would do the health piece, I think that’s something we’d be open to. I’m pretty open-minded. I don’t have a view there is only one way to do it. There are probably different models that could work.
There is a place for the private sector but ultimately because of the challenge of these unlimited benefits a public/private combination [is necessary]. It is in everyone’s benefit—consumers, federal and state government and the insurance industry to work together to try to come up with ways to make it affordable for people to get coverage and then decide how to share the risks.