Economic Downturn May Favor Leaner, More Affordable Long-Term Care Insurance Products

Leaner, more affordable long-term care insurance (LTCi) products will become more popular as a result of the recent economic downturn, according to Malcolm Cheung, vice president, LTC Prudential.

Cheung, one of the featured speakers at the Society of Actuaries’ Impact of the Economic Environment on the Long-Term Care Insurance Industry Webinar, surveyed seven of the top LTCi providers on the impact of the recession on the industry, consumer behavior, product design, pricing and sales.

Effect on the Industry

Heung said credit rating downgrades, plummeting stock prices and government bailouts will greatly contribute to public concerns and LTCi products will be more susceptible to these due to the very long tail of liability. It has increased public awareness about the strength of financial institutions. This may lead to a flight to quality LTCi carriers based on size, brand strength, whether the company is mutual, stock, multiline or monoline, he said.

Carriers will likely increase their focus on product viability and the efficient use of capital in response to significant investment losses and the need for capital infusion to support annuity guarantees. Cheung says providers will slow the growth of their LTCi business or drop the product if it doesn’t meet their profit objectives. The pricing evaluation actuaries of companies who will remain in the market may use more conservative assumptions to improve profitability or reduce risk exposure, he says.

Regarding the effect of the recent economic changes on carrier and distributor commitment to LTCi, Cheung said majority of the respondents said both carriers and distributors of all sizes will be challenged with some players exiting the market within the next two years. Majority of the respondents expect sales to decline in the next two years but experience growth on the third year as the economy starts to recover said Cheung.

Effect on Sales

The economic stress may have a favorable long-term impact on LTCi sales and trigger a paradigm shift on consumer behavior, Cheung said.  He predicted consumers will veer away from conspicuous consumption and the heavy use of debt to fund immediate needs and focus more on savings, protection and planning for the future. As the market volatility has severely eroded retirement savings of baby boomers, the recession highlights the need for the type of stable protection that LTCi provides.

Consumers and producers both will likely put greater focus on more affordable LTCi products. “Lower cost reimbursement plans will increase in popularity at expense of more somewhat more expensive cash or disability model plans,” said Cheung. “Consumers may be willing to buy less rich, lower cost, more affordable policies knowing that Medicaid can be their stop-loss carrier without the need to spend down their assets.”

In the short-term, Cheung sees the less expensive form of inflation protection riders – e.g., 3 percent compound, CPI index, automatic compound, simple inflation – and products with no inflation protection riders at all -- may be more popular. Non-forfeiture options generally available on LTCi policies will be too expensive and lose their appeal.

Hybrid or combo products such as annuity-LTCi will become more tax and cost-effective to consumers under the Pension Protection Act of 2006 and should increase in popularity.

Effect on Pricing

Financial services risk managers may revise the definition of “extreme events” as a result of the recession, Cheung said. As insurance migrates to an economic capital model for capital management, will a more conservative definition of extreme event result in even higher capital requirements for LTCi products, Cheung asked.  “Will this increase the cost of LTCi to consumers further? Will this make a relatively expensive product even less affordable and ultimately will this result in even more companies potentially leaving the market place?” he asked.

Cheung believes the economic environment can impact the pricing of LTCi policies several ways. As discretionary income decreases, he foresees higher lapse rates. He explains that low lapse rates have been one of the factors that make LTCi policies expensive. Participation in employer-provided group LTCi plans may also drop and have an effect on cost.

The projected deficit spending that is expected to take place increases the risk of higher inflation in the future. Higher than expected inflation can have two effects on pricing. Cheung expects inflation protection riders will increase the cost of LTCi products at higher rates. If the product is priced based on some degree of claim salvage, higher than expected inflation would erode those salvage claims over the life of the policy, he says.

On the other hand higher inflation means higher interest rates. If the higher interest rate is sustained it could improve product financial performance. This in turn could help keep premium prices down.

Effect on Product Design

In response to the question on how LTCi product design would change if the recession continued for another two years Cheung reported that most carriers indicated that they will offer plans with shorter coverage with future purchase options and non-automatic inflation protection riders. The carriers surveyed also said they did not expect less comprehensive nursing home policies will become more popular.

Cheung expects carriers to roll out more affordable non-traditional products that may focus on providing insurance coverage to keep premiums down and may include features found on healthcare plans such as co-insurance, managed care and wellness program