Long-Term Health Care the Next Run-off?

The third session of the Education Day was entitled “Is Long-Term Health Care the Next Run-off?” Mark Goodman, Partner with Freeborn & Peters, moderated the panel consisting of Vince Bodnar, Chief Actuary of Long Term Care Group, Inc., and Doug Greer, Senior Director at Alvarez & Marsal. The hour-long session was detailed and the 40 slides shown may be reviewed on the AIRROC website.

Many people in the audience had not bought long-term care (“LTC”) insurance, which is designed to cover long-term services and supports, including personal and custodial care in a variety of settings. As noted in the description of the session, the panel discussed the size of the market, pricing considerations, regulatory response, concerns and challenges.

Vince Bodar advised that 7 million Americans have LTC insurance, although 45 million will need such insurance by 2025. LTC is a $720 billion market in 2016, only 3% of which is privately insured. One-third of LTC is paid for by Medicaid and Medicare. Only 10 or more companies are writing new LTC policies now. 70 companies have runoff LTC blocks. Incurred claims will continue over time and current policy reserves of $103 billion will increase.

Doug Greer discussed the evolution of LTC insurance using slides demonstrating the changing format of the coverage provided and the growth in the industry that started in the mid-1980s, with rapid growth from 1995-2002 (130 insurers).  The market contracted starting in 2003. Slide 7 lists the ten largest insurance group “closed blocks- i.e. runoff opportunity).

Vince Bodar explained that the crash of LTC insurance was caused by a number of factors:

1)    Its design makes it a very risky product;

2)    Environmental developments – very low lapse and mortality factors, unforeseen drop in interest rates and emergence of assisted living facilities;

3)    Insurers exiting from the market – total premium of $1,033 million as of 2001 and $320 million as of 2014;

4)    High new business premium rates – premium cost is out of range for most of the middle class; and

5)    Challenges getting regulatory approval for rate increases – only a third of the rate increases requested is approved.

The financial distress in the LTC insurance market was briefly discussed. In 2008 Conseco transferred 140,000 LTC policies to a state trust.  The Penn Treaty (2009 rehabilitation) is expected to become the most expensive LTC liquidation with $3 million covered by a guarantee association.

Although high interest exists in buying runoff LTC books (mostly from Asia and/or private equity backed-reinsurers), few deals are occurring as it is difficult (1) to find price points both parties can agree with and (2) to completely off-load risk.

In terms of future outlook, LTC services will evolve. Baby boomers will demand change and not expect help from their children. Emerging technology will make LTC more efficient and less labor intensive. LTC costs will continue to rise and it will be easier to reduce benefits than to ask regulators for large premium increases.