Last week, Genworth Financial, the dominant player in the traditional long-term care insurance market, acknowledged it is continuing to struggle to keep the product afloat. The firm announced it increased its reserves against future insurance claims by $531 million and said it is reviewing outstanding policies to determine whether it will have to take an additional charge before the end of the year. Its stock price plummeted by more than one-third (though it has rebounded a bit since) and the firm is facing enormous pressure from Wall Street to stop selling LTC policies.
What happened? In part, people are collecting more benefits than Genworth expected, and for a longer period– 2.9 years on average instead of 2.2 years. The number people on claim for 4 years or more has increased by a steep 10-13 percentage points, the firm said. This is happening mostly with older policies.
At the same time, interest rates remain low, cutting the firm’s investment returns.
Overall Genworth’s long-term care insurance division posted a $361 million operating loss for the 3rd quarter. Individual sales revenue fell from $37 million a year ago to $28 million. Group sales fell from $3 million to $1 million. According to Bloomberg News, the investment firm Keefe, Bruyette and Woods values Genworth’s LTC business at a negative $750 million and assigns no value to new sales.
Genworth CEO Tom McInerney has bet his job on LTC insurance. When he was hired almost two years ago, the firm’s board urged him to dump the product. After a year-long review, he decided to keep it, convinced that a combination of new products and big rate hikes for unprofitable old policies would turn the business around.
He still could be right. If Wall Street and his board gives him the time he needs, he might be able to clean up those old policies and focus on selling new ones. But he’s found that fixing the free-standing LTC insurance business is more complicated, and will take more time, than he thought.
McInerney has aggressively tackled the problem. He’s raised premiums and toughened underwriting standards for new products. New offerings limit coverage to no more than five years, which would protect most purchasers but leave those with true catastrophic costs without insurance.
On top of its traditional coverage, Genworth has also started to sell relatively low-cost, low-benefit policies in an effort to keep premiums below $100-a-month. New plans include care coordination benefits as well.
Yet, the firm is still weighed down by those older policies.
He’s requested, and largely received, permission from state regulators to raise rates—often significantly. For some legacy policies, Genworth has asked for rate hikes of as much as 76 percent, and received approval for increases of as high as 47 percent. Genworth won’t sell in three states–Massachusetts, New Hampshire, and Vermont—that did not grant rate hikes.
And the firm has been lobbying state regulators to allow it to raise premiums by a modest amount each year—much like health insurers—so it would no longer have to ask for much bigger but less frequent rate hikes. McInerney won’t say whether any states have OK’d that change but he has consistently argued that without it, Genworth would withdraw from the business.
Many of Genworth’s competitors have left the market. Only about a dozen carriers—mostly mutual companies that do not have to face Wall Street investors– remain.
Genworth’s grim news raises several key issues for the future of LTC insurance:
Are we looking at a classic death spiral for free-standing LTC insurance, where policies appeal only to the highest-risk buyers and the resulting high premiums drive away the healthy consumers needed to keep the market functioning?
Given high premiums for traditional policies (Genworth says the average annual premium for a new policy that pays $154/day for four years is $2,400) are there viable alternatives to traditional LTC insurance? Are more affordable short-term, low-benefit policies a sensible option? What about so-called combo products that combine life insurance or annuities with long-term care coverage? Is longevity insurance an option?
Who will cover truly catastrophic LTC needs? If private insurance won’t, should government do so though some form of public insurance? In some sense it already does with Medicaid. But what are the fiscal consequences when those very long-term costs are so uncertain?
Is a voluntary free-standing insurance product viable at all? Or can this product only work if coverage is required, or at least strongly encouraged through a mix of government incentives.
Finally, without insurance, how are we going to pay for long-term care costs?