Long-term Care. A product in transition. ASNY Spring Meeting

Transcription

1 Long-term Care A product in transition ASNY Spring Meeting

2 Agenda Section One Needs of LTCI Strong need due to increasing life expectancy Public options are not ideal Medicaid and Medicare are not enough Section Two What went wrong? An example of mispricing mortality and lapse assumptions Low interest rates imply lower investment returns Section Three 3 strategies companies are pursuing Strategy 1 Exit the market Strategy 2 Continue with a higher price Strategy 3 Long-term Care 2.0 Section Four What s in the future?

3 Section One - Needs of LTCI Strong need of long-term care (LTC) services due to increasing life expectancy An estimated 6.4 million people in the United States over age 65 and over need long-term care One in two people age 65 and over will require formal LTC services during their lifetime Approximately one out of every four U.S. households provides care to a relative or friend age 50 or older

4 Section One - Needs of LTCI Relying on public options to fund LTC services is not ideal; Medicare will only pay for a short period of time and Medicaid is only available for those with virtually no assets Medicare Eligibility Age 65+ Hospitalization for three full days Admittance to a Medicare-certified nursing facility within 30 days of hospitalization Need for skilled care Medicare Covered Services Full coverage for 20 days in a certified skilled nursing facility Coverage above $ per day (as of 2010) for days Medicare will also cover home health care if a doctor certifies it is medically necessary and the beneficiary is home bound Medicaid Eligibility Income requirements vary by state, in general it is set around the poverty level ($23,050 for a family of four) Countable assets under $2,000 for a single person or $3,000 for a couple (uncountable assets include primary residence, one car, personal belongings) Medicaid Covered Services Full coverage in a certified skilled nursing facility

5 Section One - Needs of LTCI Medicaid is the dominate source of payment for long-term care, followed by out-of-pocket payments by individuals and families Long-term Care Expenditures by Source, FY 2010 In Fiscal Year 2010, total spending (public, out-ofpocket and other private spending) for long-term care was $208 billion, or 8% of all U.S. personal health care spending

6 Section Two - What went wrong? An example of mispricing original assumptions for a 65 year old male in 1990 Long-Term Care Assumptions Issue Age 65 Premium $1,685 Net Premium is 65 % of Gross or $1,095 Incidence Rates 70 % of SOA LTC Ins Val Methods Task Force Table Male Pricing Interest Rate 7.00% Benefit Period 7 years Elimination Period 90 Days Lapse Rates 5.00% Mortality 1983 GAM Benefits are 100 per day in Home Care or Nursing Home increasing 5% per year Home Care Benefits are received 4 days per week Benefits incurred due to loss of 2 ADL s or Cognitive Impairment Assumes Claims Incurred End of Year

7 Section Two - What went wrong? Mispricing lapse assumptions and corresponding premium shortfall Lapse rates Lapse Supported Policy When a policyholder lapses their level premium equity is forfeited and distributed to those who survive The higher the lapses the greater this distribution and the low the price Less lapses occurred than expected An example of premiums under different lapse assumptions Price with 5% Lapses $1,685 Price with 2% Lapses $2,277 Shortfall 35% of Premium For some companies lapses have been less than 1%

8 Section Two - What went wrong? Mispricing mortality assumptions and corresponding premium shortfall Mortality Ratio of 1983 GAM to Annuity 2000 at selected ages Age % Age % Age % Age % An example of premiums using 1983 GAM mortality rates v.s. Annuity 2000 Price based on 1983 GAM $2,277 Price based on Annuity 2000 $2,642 Shortfall 14% Age %

9 Section Two - What went wrong? Low interest rate environment implies lower investment returns; LTCI premiums could increase by 10% to 15% per every 1% decrease in long-term interest rate Total Assets Thousands $35 $30 $25 $20 $15 $10 $5 $0 Effect of Reinvestment Assumptions on the Value of a Long-Term Care Policy Years 7.0% Reinvestment Rate 5.5% Reinvestment Rate Cumulative losses

10 Section Three - 3 strategies companies are pursuing Strategy 1: Exit the market - a number of insurers left the market which increases concentration of those who remain National Association of Insurance Commissioners 2010 Long-term Care Insurance Experience Report Top 10 Companies by Actual Earned Premiums* Discontinued sales in 2011 Discontinued sales in 2003 Sales freeze in 2012 Discontinued sales in 2005 Discontinued sales in 2012 *Source: NAIC Long-term Care Insurance Experience Reports for 2010

11 Section Three - 3 strategies companies are pursuing Strategy 2: Continue with a higher price insurers file for rate increases in order to stay solvent Carriers currently in the business with current product design: John Hancock TransAmerica Thrivent Mutual of Omaha New York Life MassMutual Genworth Northwestern Mutual Companies are limiting benefits (e.g. eliminating lifetime benefits) and tightening underwriting (e.g. requiring blood test)

12 Section Three - 3 strategies companies are pursuing Strategy 3: Long-term Care 2.0 Objectives Objectives of LTC 2.0 Creation of a pooling mechanism Risk-pooling mechanisms can mitigate the financial impacts of long-term care on individuals by spreading long-term care costs across users and non-users of services However, pooling morbidity risk requires assuming lapse, mortality, and interest rate risk Removal of bells and whistles No more non-tax qualified policies No more short elimination periods (i.e. 0 day EP policies) Removal of incentive for policyholders to over-utilize benefits No more policies with lifetime benefits

13 Section Three - 3 strategies companies are pursuing Strategy 3: Long-term Care 2.0 Examples Northwestern Mutual Par Products Permanent life insurance (sometimes referred to as whole life insurance) provides protection for your entire lifetime in most cases. Concept when applied to Long Term Care provides a conservatively priced product with gross of dividends and a competitive product net of dividends. The dividend feature allows the company to adjust as experience emerges without needing regulatory approval. John Hancock Interest Sensitive Products Interest sensitive whole life insurance policies provide life insurance coverage along with income tax-deferred Accumulation Value. It is appropriate for individuals who have permanent life insurance needs and prefer the consistency of a fixed premium. When applied to Long Term Care this allows a product to be priced with a conservative interest rate with excess investment earnings used to purchase additional benefits. Lincoln Financial MoneyGuard Tax-advantaged LTC benefits: If you need long-term care, it provides income tax-free reimbursements 1 for qualified long-term care expenses or An income tax-free death benefit: If you never need care or only use a portion of your benefits, you will have an income tax-free legacy for your beneficiaries or A money back guarantee: You can request your money back with a guarantee available through the Return of Premium Rider on single premium and certain flexible premium universal life policies. There is a one-time cost for the Return of Premium Rider. See Rider for complete terms and conditions. The amount returned will be adjusted for any benefits paid and any loans and withdrawals, and may have tax implications.

14 Section Four - What s in the future? More hybrids focused on the LTC benefit Actuarially Fair Non-forfeiture Death Benefits Lower benefits (to accommodate higher margins): longer elimination period, lower inflation increase, facility only)

15 Questions?

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