Exiting the Market: Understanding the Factors behind Carriers' Decision to Leave the Long-Term Care Insurance Market. A. Entering the Long-Term Care Insurance Market

07/01/2013

LTC insurance has been selling in the marketplace for the better part of 30 years. Early versions of the insurance were called "nursing home insurance." This is because such policies only covered care provided in nursing homes, primarily skilled facilities. In the late 1970s, early 1980s there were a small number of companies providing such coverage some of whom included Penn Treaty, Equitable, and Medico. They entered the market at a time when expenditures on LTC were less than $20 billion which then quickly grew to $30 billion in 1980 and over $70 billion within a decade.14, 15 Most of the costs were borne by individuals and their families and already such care represented an uncovered and potentially catastrophic expense. The problem of LTC financing was recognized by policymakers who in the late 1980s debated a number of bills aimed at paying for substantial LTC costs.16 This occurred against the backdrop of more than 1.7 million private policies having been sold to individuals during that time.

Most of the firms providing nursing home products in the 1980s also distributed other types of insurance. All were multi-line companies, the most prominent of which was the Fireman's Fund, which then became Amex Life in the late 1980s and G.E. Capital and Genworth Financial (1990s). These early pioneers were motivated by the perceived opportunity represented by demographic trends, but more importantly, the sense that this coverage was not all that different from the Medicare Supplement policies that were beginning to proliferate in the market. In some sense early nursing home policies were viewed as a variant of such policies. This view, shaped early approaches toward pricing, which will be discussed in a subsequent section.

We asked executives in the sample to recount why their company had initially entered the market. Three of these companies began selling policies in the 1970s, ten in the 1980s and almost all of the remainder in the 1990s. When these companies entered the market most (73%) offered a nursing home-only policy -- many having entered in the 1970s or 1980s -- and slightly more than half (57%) also offered comprehensive policies covering both nursing home and home care services -- all companies that entered the market in the late 1980s and early 1990s.

Consistent with our model of firm behavior, Figure 1 shows that almost half of the companies entered the market because they believed it represented a profitable opportunity. However, profit maximization was not the only reason for entering this market. Many companies felt that such a strategy supported efforts to show market leadership and to provide new product to their sales force to keep them engaged and committed to selling the company's other products. During detailed discussions with respondents, it was clear that compelling demographics and a perception of increasing consumer need drove many companies to enter this market to take advantage of an opportunity that they knew existed, even if they were not completely certain about how to exploit it profitably. Not shown in the figure is the fact that among these companies who left the market, 80% had senior management that was either supportive or very supportive of the decision to initially enter the marketplace.

FIGURE 1. Primary Motivations for Entering the Market

Bar Chart: Belief that this presented highly profitable opportunity in contrast to other insurance opportunities (48%); Pressure from field force to put forward LTC policies (28%); Upper management wanted to do this to help sell other policies (24%); Effort to show innovation to marketplace and market leadership (40%); Belief that knowledge and expertise from other products could be easily applied to LTC (28%); We saw this as a way to gain experience in the senior market (20%); Other (36%).

SOURCE: Survey of executives from 26 LTC carriers who exited the market or exited segment of the market.

NOTE: Numbers sum to more than 100% because respondents could check more than a single motivation.

Even 30 years later, the need for a product addressing the catastrophic costs associated with LTC needs persists. The consequence of demographic trends, a lack of comprehensive public solutions, and an inadequate private market is that LTC remains the largest unfunded health-related liability faced by elders during retirement. While demographics and consumer need have remained constant over the period, perceptions about the actual profit opportunity presented by this market have definitely changed.

Figure 2 highlights the initial business strategy of companies and demonstrates that for 40% of the companies that left the market, their initial business strategy was to grow modestly in order to learn the business and improve their management of the product over time. Only 16% had aspirations of becoming market leaders.

FIGURE 2. Initial Business Strategy

Pie Chart: Grow as quickly as possible to become a market leader (16%); Grow modestly to give time to learn about product; no aspirations to be market leader and grow rapidly (40%); Enter market very cautiously with low growth targets (12%); Don't Know (8%); Other (24%).

SOURCE: Survey of executives from 26 LTC carriers who exited the market or exited segment of the market.

We also asked which business metric was viewed as the most important to measuring the success of the endeavor during the first five years after market entry. Slightly less than half (48%) of companies indicated that meeting sales targets was most important. Profitability and meeting underlying pricing assumptions during the first few years of sales were cited by fewer than 25% of respondents; this suggests that there was a realistic understanding that given the long-term nature of the underlying risk, as well as the relatively high initial costs associated with selling and underwriting new policies, profit emergence and credible actuarial experience would be relatively slow in developing. The first measurable goal would be sales.

Most companies tried to differentiate themselves from their competitors through innovative product design as well as sales incentive plans. Some of the innovation proved to be confusing for consumers, and in particular, competition related to the benefit eligibility trigger. Some companies made eligibility for benefits dependant on the ability to perform varying numbers of activities of daily living (ADLs) and instrumental activities of daily living. It was nearly impossible for an individual to know which set of conditions they were likely to meet 20 years into the future to qualify for insurance payments. Benefit trigger standardization did not occur until the passage of the Health Insurance Portability and Accountability Act (HIPAA) of 1996. Companies also expanded coverage for more community services including caregiver support and respite care, restoration of benefits, transportation services, and other ancillary benefits.

Figure 3 shows how companies evaluated the key risks associated with this product. More than half of companies were most concerned with the future claims risk or the fact that this risk had a "long-tail". In other words, they were not certain how long an individual with LTC needs would require paid services. A relatively high percentage of policies had lifetime or uncapped benefit durations, which meant that they would pay benefits for as long as someone had continued need -- which represented an uncapped liability to the company.

FIGURE 3. Evaluation of Most Volatile or Greatest "Potential Future Challenge" at the Time of Market Entry 

Pie Chart: Claims risk (32%); Distribution risk (12%); Regulatory risk (8%); Interest and lapse risk (4%); Long-tail risk (20%); Don't Know (16%); Other (8%).

SOURCE: Survey of executives from 25 LTC carriers who exited the market or exited segment of the market.

It is somewhat ironic that few companies were concerned with what turned out to be the two most significant drivers of future poor financial performance -- the interest rate and voluntary lapse rate assumptions built into the product. Lower than expected interest rates and voluntary lapse rates have forced almost all companies to seek rate increases, and this may have contributed negatively to sales as well as to the reputation of both the product and to a number of companies. As will be demonstrated in a subsequent section, errors in these assumptions had a major negative impact on product profitability.

We also asked companies which objectives were not met during the first five years of market entry. Roughly two-in-five indicated that sales objectives had not been met and half indicated that either underlying pricing objectives (25%) or initial profitability targets (25%) had not been met. Thus, fairly early on, for a clear majority of these companies, the key metrics established to judge whether the initial decision to enter the market had been a good one, were not being met. Moreover, early undefined goals may have led to later disappointments.

Since the time when most firms entered the market, the industry has experienced a number of major changes, many of them directly and indirectly contributing to the current picture of the industry. These include changes in product, risk management strategy, sales approaches, and the regulatory and public policy environment. We summarize these key trends in order to provide an historical view of industry developments through the first decade of this century.

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