Potential Impact Of COVID-19 On The LTCI Industry

COVID-19 will have significant impacts on the long term care insurance (LTCI) industry in 2020 and perhaps beyond. The following comments are speculative and should be viewed as intending to encourage thought and discussion rather than being relied upon.

Every 100,000 deaths from COVID-19 would increase 2020 deaths by close to 3.5 percent and represent 1/30 of one percent of the population of the United States.

Claims

  • Higher mortality could lead to shorter claim durations. People in nursing homes appear to be among the most vulnerable to COVID-19. To the degree that COVID-19 causes premature deaths of LTCI claimants, this tragic result could reduce the financial instability of older blocks of policies.
  • Home care claims may be depressed. “Sheltering in place” is expected to reduce commercial home care expenditures, as home care providers are less willing to visit and less welcome in homes, and spouses and children may be more available to provide home care services while staying home.
  • Future claims on inforce blocks may decrease somewhat because of terminations due to death and inability to pay premium. On the other hand, people may avoid seeking treatment unless it is absolutely necessary and doctors may shift their focus to COVID-19 (at least in the short term). As a result, chronic conditions may be less effectively diagnosed, monitored and treated, which could cause somewhat higher LTCI claims in coming years.
  • Future claims could increase if people who survive COVID-19 become more susceptible to needing long term care, but this will not be known for some time.
  • If COVID-19 ends up having an “annual” season (like the flu) or even less frequent recurrences, it could have an impact on claims incidence and claims length. The greatest impact might be higher mortality rates at older ages, which would reduce the cost of claims. But if vaccines are developed, there may not be a significant impact on the claims experience of today’s sales.

Premium income and persistency

  • Unemployment will likely cause some policyholders to be unable to continue premiums and some employers might stop paying LTCI premiums or might pare their executive carve-out ranks. Because terminations (deaths and lapses) will likely increase in the short term, COVID-19 should lower future premium income. However, as a result of such terminations, insurers will release reserves, which might more than offset the loss of income.
  • Insurers are generally extending grace periods by 30 to 61 days. It is our interpretation that the Third Party Notification will be delayed, but the subsequent time available for the Third Party to cure the overdue premium will be the normal length. Some insurers seem to be a bit slower to respond than for previous emergency situations, despite having their past precedents. Because regulators from various states were instituting requirements, insurers held off to avoid having to repeatedly update their COVID-19 response. For example, Alaska mandated that policies cannot be lapsed prior to June 1. Delaware forbid lapses during the pendency of the emergency order.¹ West Virginia seems to have mandated an open-ended restriction on terminating coverage.¹ California requested a 60-day grace period,² and Wisconsin requested flexibility.¹ To the degree that insurers grant such grace periods to consumers with adversely-impacted cash flow, insurers will suffer inferior cash flow.³ To the degree that they never receive some of the due premium, they would have extended a short period of coverage with no corresponding premium income. However, in that case, they would be experiencing higher lapse rates than anticipated, which should improve profitability.

Investment income

  • Reduced investment income may result due to COVID-19. For inforce business, mortgage and bond defaults would be harmful, but a low interest rate climate may be less harmful for older blocks experiencing negative cash flow.
  • A prolonged recession or depression might keep interest rates low. On the other hand, some people believe that the increased government spending resulting from COVID-19 will spur inflation that would cause nominal investment yields to increase. Inflation would likely make today’s sales more profitable (less exposed to price increases) because it could increase investment income on future premiums and reinvestment of assets. Although inflation would drive higher long term care costs, which could increase claims, the daily or monthly maximums of LTCI policies put a limit on the degree to which claims could increase.
  • Insurers may respond to expected lower investment income by raising new business prices and restricting single premium options.

Expenses

  • Insurer expenses may drop somewhat in 2020 primarily due to lower new business expenses and other administrative expense reductions. In the long run, expense variations due to COVID-19 are not likely to be significant.

Sales

  • Sales to individuals and couples will rise or drop for conflicting reasons:
    • Economic activity is depressed in the early stages of this pandemic, and income instability makes it unwise to commit to more on-going outflow.
    • Reduced asset values may cause some people to reconsider LTCI instead of self-insuring. According to Don Levin, President and CEO of USA-BGA, GE Financial had its best LTCI sales the month after 9/11, “Because it showed the country how quickly life can change in the blink of an eye.”
    • Some people who were convinced that the government would take care of them may become less confident as a result of the COVID-19 related government debt.
    • More people may be reviewing and seeking to increase their financial security, and people quarantined at home may be more easily available for remote solicitation, education, and sales.
    • Some insurers discontinued older age sales because they cannot complete face-to-face interviews.
  • A desire to replenish one’s estate and increased conservatism may accelerate interest in linked-benefit products.
  • New worksite sales may decrease significantly as employers are focused on other business and employee issues. Furthermore, workforce continuity is unusually uncertain and face-to-face enrollment temporarily discontinued. In 2021, the market might benefit from pent-up demand, but resulting enrollments might not take place until late 2021 or early 2022.
  • Worksite enrollments of new employees in existing programs are less affected because people become eligible automatically without executive decision-making. However, decreased hiring means decreased add-on sales.
  • Core/buy-up elections and voluntary participation are likely to decrease as employees are less confident of family net income.
  • Insurers should see a spike in the use of eApps and fillable apps as face-to-face solicitation will ebb.

Operations

  • Insurance operations are well-suited for remote employment and insurance company staff have the knowledge and resources to work remotely. Reduced sales should reduce stress on some operational staff and may result in some layoffs.
  • LTCI underwriting should be less affected than underwriting of products which require more time-of-sale health screening. However, in addition to difficulty scheduling face-to-face assessments, potential problems such as slower transmission of medical records may occur. If an insurer requires someone to go to the doctor before applying or if an insurer wants an updated test, the related application is likely to flounder because people may not want/be able to go to their doctor’s office. As noted above, insurers are capping the sales age due to inability to perform face-to-face assessments. In response, insurers are developing capability to do face-to-face assessments electronically.
  • Some states have temporarily suspended fingerprint requirements, at least in some cases, issuing temporary insurance licenses to brokers. Such brokers will be required to complete the fingerprint process at a later date.
  • Some insurers are expanding electronic policy delivery, which may change typical processing even post-COVID-19.
  • Particularly where cash benefits are payable, insurers will be diligent to assure that they become aware of deaths.

Other

  • A. M. Best has committed to stress test insurers regarding COVID-19.⁴
  • West Virginia required insurers to provide a “preparedness plan” by April 2 to address maintaining an adequate workforce, assuring on-going processing, evaluating the ability of third parties to continue necessary service, a communications strategy, etc., under a variety of COVID-19 projections (determined by the insurer). The “preparedness plan” must also have been tested by April 2. In addition, West Virginia required an assessment of the impact of COVID-19 on reserve requirements, credit exposure and counter-party credit risk, assets that may be adversely impacted and the overall resultant potential impact on earnings, profit, capital, and liquidity.⁵
  • Wisconsin has ended its normal deemer provision that results in insurance policy filings being approved if the state does not respond within a particular time frame.⁶

References:

  1. https://www.onedigital.com/blog/covid-19-relief-states-begin-extending-insurance-premium-grace-periods/, accessed on Mary 29, 2020.
  2. https://www.wvinsurance.gov/Portals/0/pdf/pressrelease/20-07%20COVID-19%20Regulatory%20Guidance.pdf?ver=2020-03-26-195235-360, accessed on Mary 29, 2020.
  3. https://oci.wi.gov/Pages/PressReleases/20200320COVID-19.aspx, accessed on Mary 29, 2020.
  4. http://www.ambest.com/about/coronavirus.html, accessed on Mary 29, 2020.
  5. http://www.pciaa.net/docs/default-source/industry-issues/20-04-preparedness-bulletin.pdf, accessed on Mary 29, 2020.
  6. https://www.squirepattonboggs.com/-/media/files/insights/publications/2020/03/covid-19-and-additional-regulatory-directives-for-insurance-companies/covid19_additional_regulatory_directives_for_insurance_companies.pdf, accessed on Mary 29, 2020.

Claude Thau is the national brokerage director for USA-BGA, which helps financial advisors nationwide serve their clients’ long term care, life insurance, annuity and disability planning needs. He also markets unique software that, among other exclusive features, provides fiduciary justification for advisors’ long term care projection assumptions and consults with entities interested in the long term care insurance industry.

Thau is well-known to Broker World readers from authoring the annual LTCI surveys since 2005. His career highlights include being a former inner-city school teacher and actuary, running a national carrier’s LTCI division, consulting for the Federal government when it developed its LTCI program and being named by Senior Market Advisor as one of 10 honorees on its Long Term Care Insurance Power List in 2007.

Allen Schmitz, FSA, MAAA, is a principal and consulting actuary in the Milwaukee office of Milliman, Inc.

He can be reached at 15800 Bluemound Road, Suite 400, Brookfield, WI 53005. Telephone: 262-796-3477. Email: allen.schmitz@milliman.com.

Chris Giese, FSA, MAAA, is a principal and consulting actuary in the Milwaukee office of Milliman, Inc.

He can be reached at 15800 Bluemound Road, Suite 100, Brookfield, WI 53005. Telephone: 262-796-3407. Email: chris.giese@milliman.com.