What Drives Long Term Care Insurance Pricing?

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"There's a lot of ways to position insurance planning where you're under-promising and over-delivering for clients on potential outcomes." - Marc Glickman

In this episode of The Insurance Experts, Tim Kelly of the LTC Collaboration interviews me about LTCi pricing today and how it has changed over the years. The Society of Actuaries (SOA) published a study analyzing LTCi market pricing as of 2000, 2007, and 2014 and we discuss the conclusions of that study. Also, we discuss the language you can use with clients to get them comfortable about new LTCi planning solutions as compared to legacy products.

LTCi is Too Legit to Quit

As seen in Broker World Magazine in the March 2017 publication with co-author Scott Olson.

True or false: The number one reason consumers are not buying traditional long term care insurance today is because it is too expensive.

Answer: False. The number one reason consumers are not buying traditional long term care insurance today is because they are afraid it will become too expensive.

The legitimacy of the LTCI market is being challenged. Advisors are hesitant to recommend traditional solutions even though there is consensus that the need for LTCI continues to outpace the protection purchased. There is no doubt about the benefits provided. Claims satisfaction rates are extremely high and customers continue to retain their policies more often than any other insurance product. There is also government support for new product purchases. LTCI enjoys myriad tax-favorable purchasing options as well as benefit enhancements from the state partnership programs. Traditional LTCI remains the least expensive way to access these rich benefits. The challenge for advisors is addressing the concerns about the stability of prices into the future because the continuing noise about rate increases from legacy products drowns out all of the positives.

Most advisors are aware that modern LTCI products have dramatically sounder pricing than the prior legacy products. However, these advisors seek product guarantees and hard evidence having been burnt by prior expectations. There is good news. Product guarantees have re-emerged in the form of new single-pay and 10-pay traditional LTCI plans as well as lifetime benefit periods being offered once again. Evidence has also accumulated showing that modern lifetime-pay plans will be much more price stable than any prior product generation. The evidence comes from two LTCI paradigm shifts that differentiate modern price stable LTCI products from legacy LTCI products.

The first paradigm shift has been increasingly sound pricing to address a variety of possible future economic and demographic scenarios. The Society of Actuaries (SOA) published a pricing study showing that the underlying actuarial pricing assumptions for modern products has been effectively de-risked. For new products, both the likelihood and magnitude of possible future rate increases are under control. The logic behind this is intuitive. The single biggest factor that drove the underpricing of legacy products was the assumption that a small percentage of people would drop their policy each year. New pricing for today’s products assumes that virtually nobody will drop their policies. By definition, this past pain point will not cause a future rate increase. Similarly, expected investment rates are now priced in using today’s record low rates making it much more likely that rate stability could actually improve from increasing rates years from now.

The second paradigm shift has been regulatory protections requiring price stability. This effectively began with policies issued after 2004 with the implementation of LTCI rate stability regulations that incentivize LTCI companies to price policies more responsibly. With the passage of time, there is now accumulated evidence that modern policies sold after rate stability regulations (Post-RS) have outperformed policies sold prior to rate stability regulations (Pre-RS). Public rate increase data shows that over 90 percent of rate increase filings have occurred on Pre-RS policies.

It is important for advisors to understand how modern LTCI products differ from legacy products, so they do not quit on the product at a time when the protection is needed the most and is safest for the consumer to buy. Advisors need to encourage consumers who are wise enough to plan for this need to get asset protection while still young and healthy enough to qualify. 

Paradigm Shift #1 – Pricing Rate Stability

Consumers’ caution about LTCI is understandable in light of the rate increases that are now occurring on legacy products. The SOA pricing study analyzed pricing assumptions from legacy policies sold in 2000 (pre-RS), modern policies sold in 2007 (post-RS), and the latest generation pricing assumptions used in 2014. The pricing of policies sold today is more conservative across every major pricing assumption:

1. Lapse Rates: The biggest reason that companies needed rate increases on legacy policies is because everyone held on to their policies. LTCI struggled under the weight of its own popularity! Companies now use a lapse assumption of less than one percent per year, leaving no room for this assumption to cause a rate increase.
2. Investment Returns: The second biggest reason that companies have needed rate increases is continually decreasing interest rates. Interest rates are now running into a fundamental economic floor such that it is much more likely to trend up rather than down.
3. Claim Rates: Claim assumptions were more aggressive during the 1990s as companies sought to maximize market share. Since then, companies have shifted emphasis to creating a profitable product line. Today, claim assumptions are very conservative estimates of actual experience, with an additional margin for error required by regulation.
4. Increased Confidence: There is 16 times more policy data and 70 times more claims data available now as compared to 15 years ago. This lowers the variability of future results and increases confidence in price stability.
5. Likelihood of Future Rate Increases: The SOA pricing study forecasted the chance of a rate increase for each generation of product pricing. The study concluded that for the latest generation product pricing there is less than a 10 percent chance that LTCI products issued today will ever need a rate increase. Furthermore, if a rate increase were to occur, the average amount of the increase is likely to be only 10 percent.

Stay tuned for next week's episode where we will discuss LTCi paradigm shift #2 involving rate stability regulations.

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