More potential LTC pain ahead, but growth & innovation, as well?

Aug. 3 –Certain assumptions made by U.S. long term care insurance carriers might lead to another reserve blow to the industry, drawing even more involvement from state insurance regulators, according to a new research note from equity analysts attending the National Association of Insurance Commissioners meeting in New York this week.

A higher-than-expected claims duration coupled with an increase in the steepness of the morbidity curve — where more older policyholders are claiming more benefits — could vex the already shaky LTC industry, especially when mixed with the uncertainty around these developments. That’s the concern expressed by the new research note from Evercore ISI global life insurance analysts.

The concerns center on the LTC insurers’ assumptions on morbidity, which refers to claim incidence rates, length of claim, and claim utilization under the NAIC’s Actuary Guideline 51 or AG 51.

Thee factors and other related ones “could cause a greater amount of scrutiny from regulators and potentially result in more pain for the industry,” they wrote in a report dated Aug. 2.

The analysts comments follow a review of submissions from the top 50 LTC blocks of business submissions on AG 51 by the NAIC’s LTC Valuation Subgroup.  

The NAIC adopted AG 51 in 2017 to hone in on long-term care insurance reserve practices. The standard-setting organization has been ever more vigilantly monitoring the LTC industry’s challenges. It has been working on a multi-tiered solution that includes uniformity in reserve adequacy tests for enforce LTC insurance and, most recently, an effort to harmonize rate increase approval processes across states so that rate increase approvals are driven by roughly the same rhyme and reason.

But “some fundamental differences across states … may take time to fix,” Evercore analysts noted, pointing to state specific actuarial data, reliance on third party actuaries in some states and the use in some states of age-based premiums increases. 

The NAIC ‘s LTC Valuation Subgroup “noticed a higher than expected variance among insurers on their baseline morbidity assumptions creating a high degree of uncertainty, particularly around older-aged morbidity,” the Evercore analysts wrote in their note. However, most of these companies are leaning toward the conservative side in their assumptions on improvement in morbidity, according to the analysts.

Yet, mortality is still underreported, according to a Society of Actuaries and an American Academy of Actuaries joint presentation at the meeting, so it is difficult to tell if policies are lapsing or ending due to death, Evercore said. A table from the actuarial presentation looked at 48,000 deaths from companies with “reasonable data during the experience period 2008-2011.” A chart contained a note that said 10 companies’ data were deemed to be reasonably reliable and had less than 25% of unknown terminations.

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The NAIC subgroup is striving to develop a new mortality table for LTC life reserves. 

Even if some companies lag in gaining approvals for needed premiums, Genworth Financial, the largest LTC writer in the U.S., recently reported that it has made a lot of progress on rate increases as it continues to educate state regulators on the need for premium hikes.

Most state insurance regulators now acknowledge “the need for significant actuarily justified premium increases on long-term care insurance policies. Genworth and I are now actively engaged with the new … [NAIC] Long-Term Care Insurance Task Force … to develop a more consistent national approach for reviewing long-term care insurance premium rates,” Tom McInerney, Genworth’s president and CEO said on a July 31 conference call to discuss second quarter results.

However, the CEO, who is engaged in an almost three-year long quest to sell the Richmond-based insurer to China Oceanwide Holdings Group Co. Ltd., acknowledged that there are still “some states that are behind on approving rate actions.”

Genworth has gained about $11.5 billion of approved LTC premium rate increases since 2012 on a cumulative net present value basis, McInerney told investors.

Separately, a segment of the industry is now experiencing somewhat of a comeback through the hybrid policy model.

About 85% of LTC sales are now through these long term care/life insurance combination, according to the SOA’s presentation on combo products, Evercore noted.  The amount of these hybrid policies sold has doubled in the last three years, the analysts added. There are now but a dozen or so companies, like Genworth that still sell stand-alone LTC insurance.   

A key benefit of these hybrid products is that adverse mortality experience — more policyholders dying earlier — “reduces the life insurance profits but increases the LTC rider profits, as fewer people will survive to claim LTC benefits,” the SOA and the AAA said in a combo product valuation presentation at the same NAIC meeting Aug. 2.



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