How big? How small? How much? How little? In my mind these remain the greatest unanswered questions in LTCI. We have danced around short and fat versus long and thin benefit conversations since the beginning, yet these two philosophical approaches to the risk have very little to do with the real problem. What is most important is to back up and take a much harder look at what you are trying to accomplish.
We know that in essence there are two markets: the middle affluent and the middle mass, both with very different income and asset thresholds. The sales history of LTCI has been dominated by larger individual sales to those clients with more to protect.
Yet what many have missed is that the middle affluent has always had a much clearer choice. Theirs is an absolute and finite option to resolve the risk—a direct decision to replace the potential financial risk with insurance. Their co-insurance decision has always been flexible in terms of elimination periods, benefit size and duration—an absolute decision-making process in a definable universe.
As we have all said many times, you pay or insurance pays. We always knew these middle affluents would in all likelihood never be a part of any government-based solution. We knew that if faced with a sure and certain catastrophic risk potential, intelligent and caring consumers would choose to leverage with insurance.
This “either or” risk evaluation will remain the sales engine for the middle affluent market. The sale is about benefit size and duration—it is only a matter of degree governed by personal financial planning choices. We have actually been fairly successful with this sale; when age, income and education is isolated, double digit market penetration emerges. This band will continue to play harmoniously and march forward because it is about money—there is never any significant threat of government dependence.
Now we come to the hard part: the middle mass market. All of these good people may become vulnerable not just to financial difficulties but, more important, to the threat of losing control of their claims. The ability to make decisions about their own care can be lost by becoming indigent supplicants to governmental largesse.
Prior claims evaluation has given us some insight. Approximately half of all claims files are closed in a year, 70 percent in two years, and 90 percent or higher in five years. To put it all in perspective, if someone had set aside $100,000 in today’s dollars, that would have paid for about 70 percent of all claims that have ever existed.
Last fall I had the privilege of working with Amy Pahl of Milliman on a presentation (“The Future of LTCI”) to the Society of Actuaries Annual Conference. Amy examined the crucial claims utilization questions that are required to build adequate product options going forward. Data from 76,676 claims was analyzed. The question of “how much is enough” began with an examination of the industry’s success to date in matching benefit to risk (what was sold and how much was actually used).
Obviously the smaller the duration purchased, the greater the utilization. However, when you average benefit period utilization, only 40.1 percent of available claimant benefits and less than 25 percent of all purchased benefits was used by the majority of claimants. Only 14.1 percent of claimants maxed out their benefits. I know we are in the business of protecting against catastrophic risk; however, considering this information, a case can be made that we may have oversold benefits.
For a majority of Americans, the most important question must be: How much supplemental benefit do I need to maintain freedom of choice and control of my own claims destiny?
Since the vast majority of our citizens will have to put all their dollars on the table when the monster of extended custodial care rears its ugly head, the question needs to be: How much do I need to add to what I already have to remain solvent from a cost of care perspective?
Until we answer the question of size and purpose we cannot possibly accomplish our mission.
Yes, it is bigger than a bread box and smaller than an elephant. And yes, it’s about money and human dignity.
And yes…other than that I have no opinion on the subject!
