Exiting the Market: Understanding the Factors behind Carriers' Decision to Leave the Long-Term Care Insurance Market - Executive Summary

Marc A. Cohen, PhD
Chief Research and Development Officer
LifePlans, Inc.

Ramandeep Kaur, MA
Heller School, Brandeis University

Bob Darnell, ASA, MAAA
Independent Consultant

July 2013

This report was prepared under contract #HHSP23320100022WI between the U.S. Department of Health and Human Services (HHS), Office of Disability, Aging and Long-Term Care Policy (DALTCP) and Thomson Reuters. For additional information about this subject, you can visit the DALTCP home page at http://aspe.hhs.gov/office_specific/daltcp.cfm or contact the ASPE Project Officer, Samuel Shipley, at HHS/ASPE/DALTCP, Room 424E, H.H. Humphrey Building, 200 Independence Avenue, S.W., Washington, D.C. 20201.  His e-mail address is: Samuel.Shipley@hhs.gov.

The opinions and views expressed in this report are those of the authors. They do not necessarily reflect the views of the Department of Health and Human Services, the contractor or any other funding organization.

Throughout the 1980s and 1990s a growing number of private insurers began providing insurance for long-term care (LTC). The market grew rapidly through the early part of this decade. By 2003, however, growth in annual sales came to an abrupt end and the market experienced a major decline. Whereas in 2002, there were 102 companies selling policies, by the end of the decade, there were roughly a dozen companies still actively selling a meaningful number of policies in the market.

The sheer magnitude of the projected growth in the retiree population along with the significant exposure to financial risk suggests that there still exists a business opportunity for companies to provide LTC coverage. As well, there has been consistent public policy effort in the form of state and federal tax incentives, Partnership Programs across a growing number of states, and public awareness and education campaigns in support of private insurance. All of this points to a strong desire on the part of public policymakers that the private insurance market grows and prospers. Yet, this has clearly not happened, and the question is, why not?

In this study we provide a systematic understanding of the growth and development of the LTC insurance market with a particular focus on the reasons why companies both entered and exited the market. We characterize the market and how it has changed over time in terms of its size, product offerings, consumer characteristics, regulatory framework, and financial performance. We also focus on firms' initial motivations for entering the market, their expectations and experience while in the market, and ultimately why so many exited the market.

A review of industry data as well as structured interviews with executives and decision makers from 26 major LTC insurance companies reveals the following key selected findings:

Market Entry

• About half of the companies entered the market because they believed it represented a profitable opportunity. Others began providing the insurance to demonstrate market leadership and to provide new products to their sales force to keep them engaged and committed to selling the company's other products.

• More than half of companies were most concerned with the future claims risk or the fact that the LTC risk had a "long-tail".

• 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 pricing of the product.

• During the first five years after market entry, roughly two-in-five companies 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.

Market Exit: Profitability Challenges

• The issue of profitability is one of many factors related to why companies entered the market but it is an absolutely central factor in understanding why many of these same companies ultimately exited the market.

• Product performance and more specifically, not hitting profit objectives was the most cited reason for leaving the market.

• High capital requirement to support the product was cited most frequently as the single most important reason for market exit.

• Other reasons for market exit related to challenges around marketing and sales, risk management strategies, regulatory policy, and the lack of reinsurance coverage.

• The key drivers of profitability are embedded in the underlying pricing assumptions used to develop premiums and are a function of company strategies related to under-writing and claims management, product design, premium structure, inflation adjustment rates, sales and marketing costs and investment strategies.

• Small variations in actual experience compared to expected performance of each of the pricing assumptions can have a major impact on product profitability.

• Since the late 1990s, all of these major determinants of premium and product profitability have been going in the wrong direction: interest rates are significantly lower than what was priced for, voluntary lapse rates are lower than for any other insurance product, morbidity is somewhat worse than expected and mortality is actually improving.

• Regarding regulatory policy, the most cited factors having a moderate influence on a company's decision to exit the market have to do with the ability to obtain rate increases in a timely manner or at all, as well as having the necessary flexibility to engage in appropriate risk management activities.

• The costs of regulatory compliance and the possibility that such compliance encumbers product innovation were not seen as factors in the market exit decision.

Current Market Activity

• Fewer than 15 companies are actively selling stand-alone LTC policies in 2012.

• As of the end of 2011, policy sales for these companies were well below 1990 levels.

• Market concentration has increased over the decade, with the top ten companies now accounting for slightly more than two-thirds of covered lives and the top five accounting for more than half of all policyholders.

• Given the recent exodus of additional companies from the market, such concentration is likely to grow.

• While there has been variability in cumulative industry claims performance over the last decade, recent data suggests that performance is deteriorating. Over the past three years, new incurred claims are 112% higher than what was expected.

• In 2010, annual premiums for companies still selling policies in the market totaled $5.3 billion compared to $4.7 billion for those who exited the market and were administering "closed-blocks" of business. On a cumulative premium basis, however, closed-blocks represented 55% of all earned premiums.

• By 2010, 55% of policyholders were being serviced by companies who had exited the market.

• Regarding claims, in 2010, closed-block companies represented 53% and 57% of annual and cumulative total claims costs.

Factors that might lead Companies to Re-Enter the Market

• About 42% of respondents affirmed their belief that the "door remained open" to re-entering the market at some time in the future; however, only one-quarter indicated that the chance was greater than 25% and the other 75% said that the chance was very low or that it simply was not going to happen.

• There were very few specific policy design changes or regulatory modifications presented to respondents that would lead companies to definitely reconsider their decision to exit the market.

• The ability to file multiple premium schedules that would be based on alternative levels of interest rates -- which in part helps to mitigate the investment (interest rate) risk -- was cited most frequently as a change that would potentially lead to a reconsideration of the decision.

• Expansion of combination-products to include LTC-disability, LTC-critical illness, or others was viewed as something that might cause companies to think about getting back into the market.

• One-in-three respondents suggested that allowing policies to be funded with pre-tax dollars also would lead them to potentially reconsider their decision.

• In answer to a broad question about factors that would encourage a reconsideration of the decision to exit the market, product structure changes were cited most often as likely to have a meaningful influence; many of these had to do with the level-funded nature of the product, the "long-tail risk", and the fact that the product is complicated.

• Those citing regulatory requirements pointed to high capital requirements, as well as a general sense that carriers needed to have more flexibility in product design.

Implications

• Changes to the underlying funding structure of products should be considered with designs that are less interest rate sensitive like term-priced products and indexation of both premiums and benefits. These approaches make the product more affordable for consumers and reduce the level of initial reserves that must be set up by the company, which in turn eases the amount of capital required to support the product.

• Deploying more sophisticated investment strategies designed to hedge against the inflation and interest rate risks can also help insurers protect underlying product profitability.

• Providing companies with more certainty regarding the anticipated actions of state insurance departments vis-à-vis requested rate adjustments is also very important to enhancing the attractiveness of the market.

• By taking some of the most risky elements out of the product, high capital requirements would no longer be justified which would remove a major barrier to entry and help justify the deployment of capital to support the product.

• Solutions to the challenge and cost of selling the product can include linking LTC insurance to health insurance, simplifying the product, providing more support for employer-sponsorship of insurance, educating the public about the risk and costs of LTC, forcing active choice, and implementing targeted subsidies.

• Provision of state-based organized reinsurance pools to provide a "back-stop" for industry experience, may also encourage more suppliers to enter the market.

Conclusions

• The lessons learned about pricing and managing the risks associated with LTC insurance from those who have left the market can help set the industry on a more solid financial foundation and make entry for new carriers a more attractive proposition.

• Identifying strategies that produce a level of profitability attractive enough to draw capital into the market is a key to assuring a robust and competitive market of insurers.

• Public policy and regulatory approaches designed to lower the cost of policies, allow greater product funding-flexibility, support new forms of combination-products, and encourage strategies that help to minimize risks outside of the control of companies, could provide needed support for a market "re-set".