LTCI Round Table:
Brittani Button, Art Jetter & Company
Michael Smith, CPS Horizon
Barry J. Fisher, Broadtower Insurance Solutions Inc.
Question: Has dependable, sustainable rate stability finally arrived in the stand-alone LTCI market?
Button: Yes. Pricing on blocks of long term care insurance policies designed prior to 2005 underestimated appropriate premiums through two pricing assumptions:
• Interest rates. Probably the most significant was the interest rate at which future claims are discounted. Sustained low interest rates proved that assumption incorrect. The discount rate used today is very small.
• Lapse Rates. Those five to eight percent lapse assumptions were grossly overestimated. Once a long term care insurance plan is in force, they rarely lapse, perhaps less than one percent.
In addition, carriers now limit benefit periods, making the potential claim predictably finite. Carriers today limit rate increase risk by using the most conservative interest, lapse and benefit assumptions.
Smith: I think it has for new products being sold. There is enough historical data and lessons learned about lapse ratios, pricing and claims that I believe the market leaders have it figured out and priced properly. However carriers will continue to ask for rate increases on older blocks of business and in some cases leave the marketplace like MedAmerica did earlier this year.
Fisher: Last year the Society of Actuaries did an extensive study to determine if current traditional product pricing is more stable than policies that were introduced 10-15 years ago. The answer was “yes”— significantly more stable. That being said, premiums on currently priced products are, in my opinion, still likely to go up sometime in the future—particularly if the overall interest rate environment continues at extended historical lows and/or claims durations exceed those that are being anticipated. The low interest rate environment also impacts combo products in two ways: First, in the ability of insurance companies to absorb the internal cost-of-insurance for the chronic illness component of the policy; and second, in the appetite of the insurance companies to want to enter the market. Older traditional policies will probably continue to experience periodic premium increases.
Question: In the current LTCI underwriting environment, should placement ratios be re-evaluated?
Button: Placement expectations should not be reduced. We all need to work to improve placement rates. Higher placement rates can result in more competitive plans, apply downward pressure on premiums, improve carrier profits, and perhaps bring more carriers into the LTCI market. We can help improve placement with solid knowledge of the client. Then, pre-screen the case, choose the appropriate carrier, quote the most appropriate rate class, get client commitment before the application is submitted, manage underwriting, and deliver the policy as soon as possible. Carriers helped recently by loosening underwriting and speeding issue.
Smith: Underwriting has gotten more choosey and I do think placement ratios could be re-evaluated. But I think some study and open discussion amongst the carriers and distributors should occur before any final decisions are made.
Fisher: Insurance companies and distributors need to take a number of actions regarding the placement rate problem. First, carriers need to create simpler, transparent, consistent and predictable underwriting guidelines for distributors, agents and consumers. By the same token, BGAs need to own the field underwriting playing field and do a better job of training agents in this lost art. Until this happens placement ratios ought to be de-coupled from compensation formulas.
Question: In a market seemingly inundated with hybrid solutions addressing the long term care risk, why should producers still recommend stand-alone LTCI?
Button: Hybrid plans have a liquidity advantage. But, traditional plans offer immediate risk transfer, and potentially significant tax advantages. A Partnership Qualified traditional LTCI plan can effectively protect assets from Medicaid spend down. Consider the difference in financial outcome for an early-on claim where only five or six annual premiums are paid before the plan begins to pay, especially with a good cost of living rider. The assets remaining are better with traditional LTCI.
Smith: If someone is truly concerned about going on a long term care claim, stand-alone LTCI is still the best solution if designed properly. Inflation riders, spousal discounts, and other potential tax breaks can allow for stand-alone LTCI to be less expensive than hybrids. However, I take the time with my clients, and we share with the agents who work with CPS Horizon, a synopsis of all variations—stand-alone LTC, life with a chronic/LTC rider, and linked benefits. Having an informed client makes for a happy client who can more easily make the buying decision.
Fisher: Traditional long-term care insurance still provides the greatest cost-to-benefit leverage for most consumers, much like term life insurance does. The attributes of consumers that purchase linked and traditional options differ greatly and there is always room for diverse and affordable choices.
Question: Do you see more producers today integrating stand-alone LTCI and hybrid life and/or annuity products in a comprehensive solution?
Button: We don’t often see a client combining a traditional plan with a hybrid plan. However, the idea has merit.
Smith: I do see producers suggesting LTCI and hybrids to their clients, but it took some time and there is still much work to do. Every day we get calls from producers looking for hybrid or stand-alone. When producers find out they have to have LTCI certification training, many become discouraged and walk away from the sale or ask us to assist. We also share the hybrid contracts with chronic illness that do not require LTCI certification, and that often keeps the producer engaged but really is just a part of the solution. The producer can’t offer traditional LTCI or long term care riders without the certification so they are only presenting part of the solution.
Fisher: The answer is that they should be but I’m afraid that not many are. A strategy of layering various solutions is a good one for many consumers. BGAs and agents need to do a better job of developing these personalized solutions.