A Closer Look -- through the eyes of an experienced actuary -- At Long-Term Care Insurance

Jack Cumming, a California CCRC resident, frequently comments on Elder Law Prof Blog posts, bringing to bear his deep expertise in financial planning matters and his equally engaged commitment to historical accuracy in a wide variety of issues. Jack is a Fellow of the Society of Actuaries, and a Certified Aging Services Professional by Examination. During what I might call Jack’s “official career” as a professional actuary, he served as an independent consulting actuary for life and health insurance operations, and before that as a corporate officer and chief actuary for insurance companies. 

I first came to know Jack during what I’ll call his “second” career.  Jack helped many, including me, understand concerns about actuarial soundness issues in Continuing Care Retirement Communities. He came to his specialized expertise in CCRCs in a unique way, by moving to a California CCRC with his wife and discovering issues that can benefit from actuarial analysis. Over the last 12 years, Jack has advised CCRC residents and providers, as well as their organizations across the nation.

Jack recently commented on an item I posted on September 12, that described a particular history of poor actuarial decisions contributing to failure of a large Pennsylvania long-term care insurance company. In that post, I also reported on a new hybrid type of long-term care product, announced by New York Life Insurance Company.  Jack’s response was, as usual, so insightful that, with Jack’s permission, I am posting his commentary here, elaborated by him, as a blog post in its own right. 

Jack writes:

A number of thoughts come to mind when reading the recent Elder Law Prof Blog post on long term care insurance (LTCi).  The Elder Law post lists a perfect storm of what turned out to be foolhardy expectations.  Morbidity was underestimated, so were contract lapse rates and mortality.  Anticipated investment returns turned out to be overstated, medical and care costs escalated, and efforts to raise premiums without triggering shock lapses proved insufficient.  The result for the industry has been devastating, as anyone who has been close to LTCi, is well aware.  Fortunately, LTCi was a small part of the business of many insurers offering the product, so losses were absorbed.  Penn Treaty, an LTCi specialist company, was not so lucky.

 

Now, with the benefit of hindsight, it thus appears that there were significant and material optimistic misjudgments made in bringing LTCi to the market.  First, the data used for the initial pricing were not sufficiently vetted. Pricing actuaries used what data they could find but, for the most part, they failed to take into account the fact that the very existence of such insurance, then being introduced for the first time, would make it more likely that people would use the benefits.

 

Moreover, the opportunity for LTC providers to receive payments promoted the growth of the provider industry to deliver services that the insurance would cover. Thus, historical data from the time before there was insurance was misleading.   Since the products lacked incentives for policyholders, or those offering services to them, to restrain their use, it was predictable that people would seek to make the most of their coverage.  And they did and continue to do so.

 

Long Term Care Insurance developed originally to give the sales agents of the large life insurance companies a product that they could sell as part of a product portfolio centered on the sale of life insurance.  Such a portfolio, in addition to life and long term care insurance, often included disability income and health insurance.  Most of the pricing actuaries who were involved in the early development of LTCi products were life insurance specialists influenced by life insurance concepts. There’s little discretion or volunteerism about dying, so mortality data used in setting life insurance premiums tend to be relatively stable and predictable. The consequence is that underwriting and claims in large life insurance companies are principally administrative, e.g. for claims, confirm the death and send a check. More subjective risks, such as disability income (DI) insurance and LTCi, require active management over the duration of a claim by highly skilled executives experienced and specialized in those particular undertakings.

 

Pricing LTCi merely by taking a table and developing rates, as is sufficient for life insurance, is not adequate for subjective risks.  In the beginning, life insurer corporate managements tended to believe that they knew insurance and had actuaries on staff, so executives responded to pleas from their sales agents and deployed LTCi products into the market. The result of that cavalier beginning is that both DI and LTCi have proven to be highly challenging and largely unprofitable for most companies offering the products. These are products that call for active management, and continuous awareness of developing trends, beyond the administrative capabilities inherent in traditional life insurance.

 

Genworth has been a prominent insurer specializing in LTCi, and they appear to have made a go of it.  Genworth’s motivations for agreeing to be acquired by China Oceanwide Holdings Group Co., Ltd. are somewhat obscure, though.  Recently, Genworth has been pushing LTCi rates higher in order to maintain the financial health of the business.  The danger is that if rising rates drive the healthier insureds to lapse their policies, an accelerating upward loss ratio spiral can result.  There is one company that does specialize very effectively in LTCi and that is Lifecare Assurance.  Lifecare is notable because it is able to provide a product to be marketed under the brands of other primary insurance companies, providing a full turnkey operation and exceptional expertise.  That approach can allow companies that might otherwise struggle with LTCi to offer a product for their sales agents with little or no financial exposure for the “private label” insurer to have to absorb.

 

The recent Elder Law Prof Blog post mentioned a fresh New York Life product [outlined as a new “long term care option" here].  To develop the product, New York Life hired Aaron Ball from Genworth to rethink its LTCi approach and the My Care product is the result.  If Mr. Ball is able to hone and motivate the needed specializations within the larger New York Life operation, then New York Life’s approach may be an exception to the traditional struggles of life insurance companies with the product. That will depend on whether those who are able to manage the business are allowed to build their careers exclusively within LTCi as it grows as a demanding business within the larger corporate structure.  Since life insurance is a sales-driven business, support for sales tends to take precedence in a life insurance company over other predictors of financial success.  That approach does not work well for subjective risks like LTCi.

 

More recently, the Continuing Care Retirement industry has been exploring Continuing Care at Home (CCaH), which allows people to receive in home LTC benefits without having to move onto a campus. While CCaH is essentially the same as LTCi, often with case management built in, state insurance departments have not required that CCaH providers be licensed or capitalized as insurance companies. That may portend future financial problems as claims experience develops and as the insureds age.  With a product like CCaH or LTCi, early experience tends to be favorable, and may seem to confirm the developers’ optimism, only to have neglected undercurrents surface later.  

 

Any insurance enterprise can show favorable early results unless sufficient account is taken of the potential for deferred claims later as the book of business matures. There is much to be said for the case managed model for a product like LTCi. It can give the financial guarantor, the insurance company in the case of LTCi, an edge in seeking to manage risk exposures and benefit responses to expectations. The challenge is that others may push back against reasonable limits on claims abuse since the providers of services stand to benefit from accelerating claims rates and durations.  The plaintiffs’ bar has been quite successful in curbing insurance company efforts to manage covered risks.

 

Thus, it seems unlikely that a healthy CCaH market can develop as a standalone venture, as is the model for some CCaH variants of LTCi. Linking CCaH to bricks and mortar CCRCs helps to dampen the financial failure risk.  Conventional LTCi insurers are also tying some LTCi products to related asset products like annuities to temper the insurer’s exposure. This can also help to ensure that policyholders have incentives to try to contain claims within what is reasonably needed.

 

As mentioned, the plaintiffs’ bar can be a challenge for LTCi.  A major step forward could be made toward viability of both DI and LTCi if the American legal system could be changed to require that unsuccessful plaintiffs pay defendants’ legal fees and other expenses. There is also a question whether contingent fee legal representation is as ethical as we would hope that our justice system might be.  Another intriguing legal question concerns where the responsibility of regulators leaves off and where the liability exposure of long term care service purveyors should begin. I’d love to know how law students think about questions like these, which are fundamental to today’s practice of law.

Thank you, Jack!