Although an ageing US
population is making long-term care insurance increasingly
important, low lapse and low interest rates have made it a product
many providers are turning their backs on. However, some insurers
remain committed to the product, predicting strong growth ahead.
Charles Davis reports.


Something of an exodus out of
long-term care (LTC) insurance business is underway in the US.
Allianz Life started the ball rolling in November 2009 when it
decided to stop selling stand-alone long-term care insurance
products in November 2009. Allianz was followed in November 2010 by
MetLife, the largest life insurer in the US.

Continuing the trend, in
recent weeks, Berkshire Life Insurance Company of America, a
subsidiary of Guardian Life Insurance Company of America, said it
was ending LTC sales by the end of 2011. The insurer cited as its
reason increasing costs of product delivery and a desire to
concentrate on life and disability insurance. A large LTC rate hike
by John Hancock Life Insurance followed soon after Berkshire’s

The same issues – low
interest rates and low lapse rates – haunt all smaller LTC players,
and even some of the larger producers. Low interest rates eat into
the returns insurers get on their investments – and those returns
go toward paying claims. Low lapse rates, which occur when insured
individuals survive longer and continue to receive claim payments
for longer periods of time – also strain insurers’ ability to make

For Guardian, the exit had
more to do with portfolio size. The insurer had about $12.6m in LTC
sales in 2009, according to data from consultancy Milliman. By
comparison, Genworth Financial, the biggest seller of such
policies, sold $107.5m in annualised premiums in 2009, according to
data from health care insurance support service specialist

“Our decision to transition
out of the market was made after an extensive review of the
business and will allow Guardian to focus on its core life and
disability income insurance business,” said Berkshire Life
president Gordon Dinsmore in a statement.



Robin Lumsdaine, the
professor of international finance at American University’s Kogod
School of Business and a senior fellow at the Center for Financial
Stability, warned the LTC market is under structural

“People are living longer and
health care costs are rising,” Lumsdaine said. “As a result, the
costs of providing LTC insurance are expected to dramatically
increase, rendering it too expensive for insurance companies to

“MetLife is an important
example; the company decided to discontinue enrolment in its LTC
insurance programme just as consumer demand for the product was
projected to grow. If others follow suit, this could deal a
de-stabilising blow to the vitality of a critical

New York Life Insurance,
meanwhile, reasserted its commitment to LTC, and said it is
expanding sales support for this line of business across the US.
Its LTCSelect Premier LTC policy will pay a dividend to
policyholders this year, marking the seventh straight year New York
Life has paid a dividend to these policyholders.


Highest sales on

Sales of New York Life’s LTC
product rose 12% in 2010, and sales in December 2010 were the
highest monthly sales on record, said New York Life, the largest
mutual life insurer in the US.

In alphabetical order, the
top US long-term care insurance carriers in 2009 included Banker’s
Life & Casualty, a unit of CNO Financial, Genworth Financial;
John Hancock; Massachusetts Mutual Life; Mutual of Omaha; New York
Life; Northwestern, and Prudential, according to the Life Insurance
and Market Research Association.

Still, headwinds remain for
LTC. The escalating medical costs LTC faces suggest significant
demand in the use of derivatives for hedging purposes to mitigate
risk. For those insurers that are also bank holding companies, such
as MetLife, more derivatives on the balance sheet means increasing
capital requirements to keep capital ratios above regulatory

Put another way, required
capital would go up, rather than down, when a provider hedges
future LTC liabilities – putting an additional demand on their
business operations. Recent interest-rate declines have made LTC
insurers wary that low returns on capital set aside for claims
would hurt the profitability of single-premium lines.

The American population is
aging, long-term care costs and needs are rising, and even the
largest insurance companies are facing difficulty pricing and
hedging risks. These additional challenges will probably drive
additional providers to exit or cut back their involvement in this

The next few years will see
more new LTC products shaped to the needs of younger buyers and
longer life expectancies. Until recently, LTC products have been
marketed almost exclusively to older clients well into retirement,
but now that Baby Boomers are living through the experience of
their parents’ later years, insurers see a real opportunity to get
pre-retirees or younger retirees into LTC packages at lower price



One of those new wrinkles is
likely to be the hybrid LTC annuity combo. The present trend is for
most hybrid LTC products to be tethered to a fixed annuity chassis.
Consumers who do not wish to pay outright for traditional long-term
care insurance now have hybrid insurance options, which can be more
attractive when compared to traditional coverage.

The annuity policy value will
increase by a fixed interest amount as guaranteed by the contract
each year. Rates will fluctuate from year to year with most
policies, but they will not return less than the minimum guaranteed
interest rate. The LTC rider will have a cost to the policy each
year – either realised or built-in, depending on the carrier. Thus,
interest credited will be offset each year by the cost of the rider
– or the rate of return will be less than a comparable fixed
annuity policy without the rider.

These hybrids have the benefit of allowing seniors to
maintain control of their money while watching their deposits earn
interest each year. Hybrid LTC annuities allow for this, while also
accounting for potential long-term care expenses – all without the
need to write a check for LTC coverage each year. They could
provide a real spark for the LTC market moving forward.