An industry makeover

Who offers coverage if it is not profitable?

Published July 28, 2015 by Robert Burke

When Genworth Financial announced last November that its long-term care insurance business had some serious money troubles, it wasn’t much of a surprise.

In recent years several other big insurance firms have quit the business, and Genworth was facing the same problems of chronically low investment earnings and higher-than-expected claims. Genworth announced last November that it had to increase its reserves against future claims by $531 million for the third quarter of its fiscal year, and its stock price dropped by nearly half.  Genworth ended the year with a loss of $760 million.

The company did better in the first quarter of this year, though not great, with a net income of $154 million. Some of that, though, came at the expense of policyholders around the country who were hit with double-digit premium increases.

Genworth CEO Thomas J. McInerney acknowledges the financial strain that customers for Genworth and other insurers are facing but says it can’t be avoided. “The whole business model is wrong,” he says. “While I think long-term care can be a good business going forward, we have to radically change it.”

Long-term care insurance is experiencing a makeover for a lot of reasons. As people like McInerney are quick to point out, the first long-term care (LTC) policies were sold in the mid-1970s, and actuaries then did a poor job of predicting future costs and the rate of return on the investments that insurers use to build up reserves.

So radically changing it means big premium increases for older policies — above 50 percent in Virginia for Genworth customers. It also means newer customers will have different policies offered to them, with more stringent underwriting and different rules for how rate increases are approved.

New state rules
Virginia’s Bureau of Insurance earlier this year approved new rules that are intended to make insurers “take a more conservative approach” in the initial pricing of policies, says Virginia Commissioner of Insurance Jacqueline Cunningham. The rules take effect Sept. 1.

The state began drafting the new rules in 2013 amid complaints from policyholders, but the new rules don’t restrict future rate increases.

That’s a frustration for people like David Notter, 65, a retired professor from Virginia Tech, who protested to regulators last year after he and his wife got a letter from John Hancock saying rate increases were possible on the policies they bought in 2004.

The couple was offered a chance to keep its premiums level — his was $1,000 a year and his wife, Janice, paid $1,500 — if they would drop the rider that made sure their benefits kept up with inflation. They took the deal but weren’t happy about it. “I can be somewhat appreciative of their situation, but you can’t just push all of that onto your customers,” he says. “It’s just not reasonable to do that.”

Low ‘lapse rate’
Yet if you ask insurance brokers, they’ll say people who bought those older LTC policies are sitting on a pile of money, even with the premium increases rampant today.

“I tell clients today that, if they tried to replicate what they have, they’d never get it,” says Linda Caruthers, a Richmond-based long-term care consultant who teaches LTC certification classes for insurance agents and financial planners. “It’s really hard when you have someone screaming about a rate increase, and I say, ‘Okay, so you’re paying $5,000 a year for a policy that will pay you $150,000.’”

Genworth’s McInerney notes that people who bought policies decades ago have stuck with them at a much higher level than expected. That, he says, is one of the reasons insurance companies are under financial strain.

Insurers usually experience a “lapse rate” of about 5 percent, meaning people buy coverage and pay premiums for a while before abandoning the policy. Genworth, however, is seeing a lapse rate for older policies of just 1 percent. That trend, along with underpricing, probably accounts “for 90 percent of all the problems” insurers have today, he says.

Even though many major insurers have abandoned the business, there’s still a need, and the answer will come either from private-sector solutions or Medicaid. The baby boomer generation is well into retirement, and in the near future many of them will develop medical conditions that require intensive long-term care. Only about 8 percent of Americans have such insurance. The rest will depend on personal savings or family income or Medicaid.

Can the market be revived?
So, for those who can afford it, LTC makes a lot of sense. John Spacek, a broker with Dixon Wells who specializes in LTC, says wealthier clients generally buy the coverage. There’s a certain irony in people who don’t need the money still making plans to get it from a source other than their own bank accounts. “They get it, because they understand risk,” Spacek says. “It’s amazing to me how many people who have incredible assets want this.”

What should be done to revive the LTC market? Caruthers wants employers to add LTC to their benefits packages so employees can buy policies for family members. Otherwise, those employees will end up missing work because they have to take care of family members.

McInerney says he’s working with key members of Congress to allow 401(k) assets to be used to pay LTC premiums. They listen to him because he’s Genworth’s CEO. He obviously has a self-interest, but the government has an interest, too. That’s because the burden on Medicaid will be huge in coming years if they can’t get more people to buy long-term care insurance. Both state and federal budgets “are much better off with a robust LTC market,” he says.