Despite the potential value of LTCI for many Americans, the LTCI market is very small.4 Approximately 8 million Americans currently have LTCI; this corresponds to about 2.5% of the total population and 3.5% of the working-age population.5 There have been many theories advanced for the relatively small size of the market, including the high cost of coverage, uncertainty about the need for LTCI, the availability of Medicaid to pay for long term care expenses, and the notion that individuals may be reluctant to forego consumption today in order to protect their estates.6 We will not speculate as to the merits of these theories but will identify ways that existing LTCI products may fail to meet the needs of potential customers.
Table 1 reports total premiums collected (in $millions) for all LTCI policies.7
|TABLE 1: Size of the Long Term Care Insurance Market (in $millions)|
|All Markets||Group (2008)||Individual (2009)|
|* Includes renewals|
Annual premium revenues from new and existing products exceed $7 billion, which represents less than 3% of overall expenditures on nursing and home health in 2008.8 In contrast, premiums for traditional private health insurance represent approximately 37% of healthcare expenditures (excluding nursing and home health).9 The individual market for LTCI is approximately five times larger than the group market, although the group market has gained on the individual market in terms of new sales. (Prior to the recession, the group growth rate has averaged 18 percent versus 12 percent for the individual market.) This reverses the predominant pattern in private health insurance where, due to tax subsidies and pooling to reduce adverse selection, the group market is far larger than the individual market.
LTCI is typically sold by life insurance companies. This reflects the idea that individuals who purchase LTCI are trying to protect the value of their estates. As seen in Table 1, the vast majority of LTCI is sold in the individual insurance market. These policies are sold by agents for life insurance companies or by independent insurance brokers. These agents and brokers invest considerable effort identifying customers who are interested in protecting their estates and offer LTCI as a natural adjunct to life insurance. LTCI in the group market is usually sold in conjunction with group life insurance.
By all accounts, insurance agents receive substantial commissions. Although we do not have specific information about LTCI, we can gain insight by considering commissions for life insurance.10 While commissions vary somewhat by firm, the typical first year commission for life insurance products is 30-50% (whole life) and 90% (term life). Commissions run 5% per year thereafter.11 Commissions may be higher for independent agents and lower for company agents. Overall, the average commission over the lifetime of an LTCI policy appears to be in the neighborhood of 10 percent.
We are uncertain whether group LTCI commissions are different from individual LTCI commissions. Because the high cost of commissions has a crucial role to play in assessing CLASS insurance viability, and because the group market is growing relative to the individual market, it will be helpful to resolve this uncertainty.
Brokers are uncertain as to how the CLASS Act will affect their business. As might be expected from incumbent firms concerned about a potential entrant, some LTCI companies are encouraging brokers to give negative information about the act.12
b. Characteristics of Policies Sold
Agents and brokers play another important role in the LTCI market; they inform consumers about a myriad of potentially confusing features. Some of these features help protect insurers against adverse selection. These include:
Pricing Structure. Premiums for LTCI are intended to be fixed for the duration of the policy. The amount depends largely on the enrollee’s age when they first purchase coverage. Most enrollees are currently in their 50s and 60s. If coverage lapses, an individual may reenroll, but the premium is based on their age at reenrollment. Although it can be very costly for individuals to let coverage lapse, the drop-out rate is considerable and drop-outs are an important source of profits for LTCI carriers.
Notwithstanding the “fixed premium” policy design, all stock companies issuing LTCI have requested and received approval for rate increases for existing policyholders in order to cover “unexpected” increases in projected spending. Increases have ranged up to 40%. (Mutual companies have not done so.)13
Maximum Daily Benefit. Nearly all LTCI policies reimburse caregivers up to a maximum pre-specified amount, known as the maximum daily benefit. Most private carriers offer a wide range of maximum daily benefits up to $400 or higher. The CLASS Act requires that HHS offer an LTCI product with a minimum average daily benefit of $50. The minimum benefit is very small relative to private sector LTCI, where the median maximum daily benefit is about $150. Indeed, only 12% of new individual policies and 18% of new group policies have daily benefits of $99 or less.14 Approximately half of all new policies offer at least $150 in daily benefits. 70 percent of individual policies and 90 percent of group policies have some sort of inflation adjustment for benefits.
Elimination Period. The number of days that the policy holder must be eligible for long term care before insurance coverage begins. Although most carriers offer a number of options for the elimination period, the typical period for nursing homes is usually 90-100 days. Some policies have a much shorter elimination period for home care. The CLASS Act does not specify any particular elimination period for CLASS insurance.
Benefit Period. Benefit periods range in length; many policies will pay benefits for no more than 5 years after the initial claim. Unlike private plan, the CLASS Act does not limit the benefit period for CLASS Act insurance.
There are additional features including inflation adjustments, pricing of spouses’ policies, handling of premiums upon the death of the enrollee, and future purchase options. Customers often ask brokers and agents to price out a very generous policy and then ratchet down the features until the premium fits their budget. The complexity of this process helps explain the important role of the broker/agent.
c. Market Structure
Nearly all of the leading sellers of LTCI are also very active in the life insurance market.
Table 2a lists the leading carriers in the group market measured by share of premiums for new policies written in 2007. Table 2b lists the leading carriers in the individual market for 2009. The tables also indicate the year in which each company (or its corporate predecessor) was founded. We do not know when each firm entered the LTCI market.
|TABLE 2a: National Market Shares and Year of Founding--Group Market, 2007|
|Carrier||Share|| Year Company
|“Fringe” carriers not surveyed||.200||n/a|
|TABLE 2b: National Market Shares and Year of Founding--Individual Market, 2009|
|Carrier||Share|| Year Company
|New York Life||.044||1841|
|Mutual of Omaha||.026||1909|
|All other carriers combined||.149||n/a|
A useful way to assess the competitiveness of a market is by computing a measure of market concentration, such as the Herfindahl-Hirschman Index (HHI), which is commonly used by the Department of Justice and Federal Trade Commission for antitrust enforcement.15 The HHI in the group market is approximately 1700, which under current antitrust guidelines is considered “moderately concentrated”; the HHI in the individual market is approximately 1260, which represents an “unconcentrated” market.16 In other words, both markets appear to have enough competitors to expect reasonably vigorous competition.17 There are other factors besides market structure that contribute to the competitiveness of the market, and we will consider these in the Industry Analysis.
There has been considerably more market share volatility in the group market than in the individual market. In the last few years, John Hancock has remained the leader in the group market but UNUM has supplanted MetLife as the number two seller while CNA and Prudential have both enjoyed substantial market share growth. In the wake of high benefit claims, John Hancock recently decided to exit the group market.18 These “share shifts” may be indicative of a competitive marketplace, or perhaps of adverse selection problems. In the individual market, John Hancock and Genworth have jockeyed for the position of market leader and Northwestern is the only carrier to enjoy a significant uptick in market share. CNA is no longer writing individual policies.
There appears to be considerable entry and exit among fringe competitors. An analysis performed in 2005 found the following:
“In the past 5 years, 18 major companies have sold out their long term care insurance business, may sell out or are gone from the market . . . Probably no one has kept track of the number of smaller companies . . . that have pulled out of the market as well. When the dust settles, if it ever does, 6 companies may represent over 80% of the market . . . .”19
Most churn occurs among fringe competitors; no firm with less than 10 years of experience in the LTCI market has more than a trivial share in the individual market.
Some LTCI policies have built-in inflation protection; others do not. Policies without inflation protection must be underwritten to anticipate future utilization. Policies with inflation protection must also anticipate future price increases.
Historically, LTCI insurers were required by state regulators (through the National Association of Insurance Commissioners, or NAIC) to have at least a 60% lifetime loss ratio (based on a comparison of the net present value of premiums and claims). This has led to pricing volatility, as expected claims costs have been volatile. In particular, differing expectations with respect to future LTC cost growth can drive differences in premiums offered today. For example, if an insurer expects LTC costs to grow at 5 percent per year, then in order to provide benefits valued at $100 today the insurer will require $551 in 35 years. If an insurer instead expects LTC costs to grow at 5.5 percent, providing those same benefits will require $650 in 35 years. This 1/2 point difference in expectations of cost growth results in an 18% difference in the perceived actuarially fair premium. The observed pricing variation likely reflects variation in cost growth projections both across firms and within firms over time.
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