Agents and brokers who have sold traditional long term care insurance policies over the last twenty years or more are now dealing with a relatively new phenomenon…substantial rate increases on older policies. Let’s look at the causes, the current situation, and how to respond.
At first, many carriers saw LTCI as a terrific marketing opportunity and rushed into the market beginning in 1988 with competitive prices. For years agents and brokers sold policies with the understanding that the carriers had appropriately priced their products and that the chances for rate increases were small. However, the industry was a young one and no one knew for sure whether or not the pricing would prove to be accurate.
The carriers then broadened the appeal of long term care insurance in the mid 1990’s by including home health care as a major benefit with little increase in premium. These benefits were very attractive to consumers, and they eventually led to a large number of home health care claims.
This in turn stressed the profitability of long term care insurance products. By the late 1990’s other problems arose, and carriers saw that their pricing assumptions were incorrect for four major reasons:
- Interest rates were well below expectations so that carriers made less gain investing the premiums they received;
- Unlike life insurance, lapse rates were extremely low creating more future policyholder claim potential;
- Claims were more frequent, with higher costs and of longer duration than expected; and,
- These factors in turn led to higher governmental reserve requirements, tying up assets.
Until now, insurance commissioners have been very resistive of carrier requests for big rate increases because they would impose extreme hardship on senior Americans with limited income and assets. Their emphasis was to protect the consumer, which was the major part of their job. They believed that insurance carriers had created their own problems by underpricing their products in order to sell more. They “made their beds” and needed to sleep in them. Insurance is a gamble and the carriers have lost, so they said.
But there has been a major change in thinking in the last five years. Insurance commissioners have realized that they need to provide carriers enough flexibility in pricing to enable them to pay future claims. Consumers in turn needed to be confident that their claims would be paid. They would be furious if their thousands of dollars of investment turned out to be wasted.
Insurance commissioners therefore needed to grant significant rate increases to protect consumers, and have done so. Because there was such a long period of time in which any rate increases which were granted were small, the rate increases needed now have only become greater as long term care insurance policies have matured. A large specialist carrier which has endured great turmoil, and is being liquidated, has been a prime example of what can happen when a carrier gets into financial difficulty. We don’t need more scenarios like that company, and the insurance commissioners know it.
This has led insurance commissioners to grant one-time rate increases as high as 80 to 95 percent on major blocs of policies. Carriers have to prove that their requests for rate increases are actuarily warranted. In many cases even the large rate increases granted have been less than those requested. One would expect the carriers to request rate increases in future years in addition to those granted thus far.
The reaction of agents and brokers are twofold. First, they are distressed that their honest past representation that the industry is a stable one has proved to be false. They are embarrassed, feel a loss of their reputation, and are empathetic with their policyholders not the insurance carriers.
Second, their will cease if policyholders cancel their policies or accept a contingent nonforfeiture benefit, which in many cases must be offered. For many this is a substantial part of their retirement income and needs to be protected. However some BGAs have contracts in which carriers will pay renewal commissions on the increase in premium. If these increases are passed on to agents, there may actually be an opportunity to receive increased renewal commissions.
In many instances insurance commissioners are insisting that carriers offer benefit changes which can ameliorate or even prevent any increase in premium. These options can or cannot be acceptable alternatives, depending on the current benefits in a policy. Let’s consider a few of them.
- In many of the older policies containing five percent compound inflation riders, the daily benefit may have grown substantially and may even be higher than the current cost of care of a nursing home. With reimbursement policies, a reduction in the inflation rate, especially for policyholders now in the late seventies and eighties, may result in little reduction in benefits actually paid out.
- In policies with lifetime benefits, the policyholders may have aged sufficiently that reducing the lifetime benefit limit to a certain benefit period may be a good gamble. This assumes that benefit periods for people in their late eighties or nineties are usually of short duration. This could even be true of a policy with say a five-year benefit period if one reduced it to a three-year benefit period.
- In many other situations one could reduce the maximum daily benefit but maintain the five percent compound inflation rider in the hopes that there would not be a claim for a few years and that the maximum daily benefit would return to its previous level or higher. This solution may be more appropriate for policyholders who are still in their sixties or early seventies.
- In policies with no inflation rider or with very little inflation of the daily benefit having occurred through increased benefit options, the policyholder should pay the increased premium if he or she can afford it. These rate increases are often well below the increases of policies with five percent compound inflation riders and are less onerous.
The rate increases normally take effect on the respective anniversary dates, so this cycle takes a whole year to occur. Policyholders are normally notified about sixty days in advance. Agents and brokers should be contacting their clients at the appropriate time and should be proactive in this process. If they don’t have current contact information, the carriers can provide at least the current mailing address and some of the time an up-to-date phone number if the phone number has changed. By servicing their policyholders, agents and brokers truly earn their renewal commissions.
They will find that their clients are initially angry and upset about their rate increases. Let them blow off some steam if necessary. However, some empathy and an honest discussion of alternatives will bring their clients around to appreciating their agent’s honesty and advice. Agents may even suggest alternatives not proposed by the insurance carrier which may be more appropriate in a given situation. It’s an opportunity to bind their relationship and even in some cases obtain referrals or sell additional products. And it’s the right way to deal with these long term care insurance rate increases.
This discussion should not end without mentioning that the long term care insurance industry has learned a great deal in the last thirty plus years, and that current rates should be far more stable. Hybrid and linked policies often have guaranteed rates, but this may not be such a big point of difference if traditional long term care insurance prices remain stable. Because the hybrid and linked products contain two benefits and the traditional long term care product has only one benefit, the traditional long term care product will probably remain the less expensive alternative.