state of the long-term care insurance industry– 44% have “other priorities” fo r money other...
TRANSCRIPT
© 2016 National Association of Insurance Commissioners All Rights Reserved 1
© 2016 National Association of Insurance Commissioners
ZZ
State of the Long-term Care Insurance Industry
State of the Long-term Care Insurance Industry
Vincent L. Bodnar, Chief Actuary LTCG
May 18, 2016
© 2016 National Association of Insurance Commissioners
Agenda
• What made LTCi successful in the early days?
• What happened to traditional LTCi?
• Attitudes of a new buyer generation
• Are hybrid products the answer?
• What else can we do?
© 2016 National Association of Insurance Commissioners All Rights Reserved 2
© 2016 National Association of Insurance Commissioners
Funding of LTC Expenses
$79b; 33%
$70b; 30%
$49b; 20%
$7b; 3%
$14b; 6%
$19b; 8%
Medicaid MedicareOut of Pocket LTC InsuranceOther Insurance Other
US spending on LTC was $239 billion in 2014
63% was funded by two social programs:
─ Medicare: Limited post-acute care
─ Medicaid: Once assets are spent down
20% from direct out of pocket spending
─ Most represents asset spend-down
Only 3% from private LTC insurance
─ 7 million insureds out of 86 million age 55+
Source: National Health Expenditure (NHE) Amounts by Type of Expenditure and Source of Funds: Calendar Years 1965-2014, Centers for Medicare & Medicaid Services
© 2016 National Association of Insurance Commissioners
The Need for Private LTC Insurance
• Asset spend-down most common funding scheme– Savings are first exhausted or moved via loopholes
– Migration to public welfare (Medicaid) afterwards
• Strain on social program funding– Medicaid’s mission is to provide a safety net to the poor
– Not meant to fund lack of LTC planning for the middle class
• Clear need for individual financial planning / private insurance– Demographics result in an unsustainable burden on public
resources
– Preserve assets / legacy funding
– Higher quality of care when privately funded
© 2016 National Association of Insurance Commissioners All Rights Reserved 3
© 2016 National Association of Insurance Commissioners
Consumer Attitudes
• Biggest fears about retirement1:– 11%: Will have too much debt
– 18%: Won’t be able to afford daily expenses
– 23%: Exhaust savings
– 28%: High medical (LTC) expenses
• Most are aware of Medicaid as a safety net, but worry that it won’t allow an acceptable lifestyle
1Source: Bankrate.com Money Pulse Survey, Feb. 18, 2015
© 2016 National Association of Insurance Commissioners
Consumer Attitudes
• Private financing of LTC is strongly preferred1
– 59% agree that individuals should be responsible
– 66% agree that owning private LTC insurance would give them peace of mind
– 51% don’t trust the government to run an LTC insurance plan
• Knowledge of LTC costs and risks is relatively low1
– Most greatly underestimate the chance of needing LTC
– 20% can correctly estimate costs in their state
– 44% have “other priorities” for money other than LTC insurance
1Source: 2014 Survey of Long-Term Care Awareness and Planning, U.S. Dept. of HHS
© 2016 National Association of Insurance Commissioners All Rights Reserved 4
© 2016 National Association of Insurance Commissioners
Unique Distribution Challenges
• Example of a product that is “sold not bought”
• Lack of awareness of risk and gaps in coverage
• Unfamiliar product features
• Expensive
• Broad distribution channels did not push– Lack of understanding of product; discomfort selling
– Already successful selling other products
© 2016 National Association of Insurance Commissioners
How the Industry Responded
• We answered this challenge with specialty distribution– Agents that are trained to sell LTC almost exclusively
• Small distribution pockets produced a majority of sales– Initial specialists were captive
– Independent specialists later emerged and dwarfed captives
• Agents were trained to:– Patiently sit with customer leads – often several hours
– Educate customers about risks and complex products
– Have rational responses to premium amounts
• Specialists often worked with broader distribution to chase leads they encountered (split commissions or referral fees)
© 2016 National Association of Insurance Commissioners All Rights Reserved 5
© 2016 National Association of Insurance Commissioners
Specialists: Key to Success
• Of the 177 carriers that entered the LTCI market– 74 sold less than 1,000 policies
– Only 56 sold 10,000 or more
• Most carriers did not train or access trained distribution and exited the market early
• Carriers that used specialists saw large sales volumes
• Key to understanding how we succeeded and how we might reenergize the market
© 2016 National Association of Insurance Commissioners
Sales Volumes
• Early success!: 20%+ growth during the 1990s
• Short-lived: Sales began to decline in 2001
(after netting out 2002-2003 FEP enrollment)
Source 1999 – 2015 Broker World Surveys
$0M
$200M
$400M
$600M
$800M
$1,000M
$1,200M
$1,400M
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14Calendar Year
New Annual Premium Issued
© 2016 National Association of Insurance Commissioners All Rights Reserved 6
© 2016 National Association of Insurance Commissioners
What Caused the Crash of Traditional LTCI?
• Level premium pre-funds an increasing costReason 1: LTCI’s design makes it a very risky product
$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000
$10,000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Years Since Issue
• Four forces contribute to increasing claim costs:– Older people more likely to need long-term care
– Wear-off of underwriting effect
– Benefits increase for policies with inflation protection
– Married people becoming widows and widowers (which have higher costs)
Level Annual Premium Rate
Increasing Annual Claim Cost
© 2016 National Association of Insurance Commissioners
What Caused the Crash of Traditional LTCI?
• Very low lapse and mortality rates
– LTCI’s pre-funding nature makes it lapse supported
– Early pricing assumptions of 4% turned out to be almost zero
– Mortality rates are lower than annuitant mortality tables
• Unforeseen drop in interest rates
– LTCI’s pre-funding nature makes it very sensitive to interest rates
– Early assumptions of 5%-8% turned out to be 2%-4%
• Emergence of assisted living facilities (“ALFs”)
– Immaterial care delivery sector when early products were priced
– Expensive ALF stays are not embedded in early pricing data
– Almost half of current confinements now occur in ALFs
Reason 2: Environmental developments
© 2016 National Association of Insurance Commissioners All Rights Reserved 7
© 2016 National Association of Insurance Commissioners
• Regulators resist large rate increases (>25%)
• Often cannot offset losses completely, resulting in reserve corrections
• Creates uncertainty for distribution and potential new customers
Deviation Yr. 5Yr. 10
Yr. 15
Yr. 20
+10% Claims 7% 11% 18% 27%
-1% Lapse 10% 16% 24% 34%
-1% Interest 8% 14% 20% 27%
All Three 28% 44% 64% 92%1 6 11 16 21 26
Year Since Launch
Premium Benefits & Expenses
Cash Flows By Year Since Product Launch Rate Increase Required to Offset Future Losses
What Caused the Crash of Traditional LTCI?Reason 2: Environmental developments
Cash flow mismatch causes corrective rate increases to grow over time
© 2016 National Association of Insurance Commissioners
2001 Sales 2014 Sales
Source 2002 and 2015 Broker World Surveys
Company Premium Share
GE Capital $243M 23%
Bankers L&C $83M 8%
John Hancock $74M 7%
C.N.A. $61M 6%
UNUM $55M 5%
Penn Treaty $47M 5%
Allianz $42M 4%
IDS $28M 3%
Fortis $26M 3%
Life Investors $26M 3%
Top 10 $684M 66%
Others $349M 34%
Total $1,033M 100%
Company Premium Share
Genworth1 $90M 28%
Northwestern $57M 18%
Mutual of Omaha $32M 10%
John Hancock $31M 10%
Transamerica2 $16M 5%
MedAmerica $15M 5%
New York Life $12M 4%
MassMutual $11M 3%
Bankers L&C $10M 3%
State Farm $10M 3%
Top 10 $284M 89%
Others $36M 11%
Total $320M 100%1Genworth is a former division of GE Capital2Excluding single premium sales
What Caused the Crash of Traditional LTCI?
Reason 3: Carrier exits
• 7 out of top 10 carriers writing at LTCI’s zenith have exited
• Affects distribution’s confidence in industry’s commitment to LTCI
© 2016 National Association of Insurance Commissioners All Rights Reserved 8
© 2016 National Association of Insurance Commissioners
Source: 2002-2015 Broker World Surveys
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Average Market Premium - 3 Year Benefit Period with BIO
Issue Age 50 Issue Age 60 Issue Age 70
PA hearing consumer question: “Is LTCI only for the 1%?”
What Caused the Crash of Traditional LTCI?Reason 4: High new business premium rates
LTCI premiums have climbed above a middle income price point
© 2016 National Association of Insurance Commissioners
What Caused the Crash of Traditional LTCI?
• Reason 5: The target market’s generation “turned over”
• We were trying to sell a 30 year-old product to a new crowd
© 2016 National Association of Insurance Commissioners All Rights Reserved 9
© 2016 National Association of Insurance Commissioners
WWII Generation
• Born 1900-1924• Also called “G.I.” or “Greatest”
Generation• Endured the Great Depression and
won World War II• Value self-sacrifice• Average of 2.4 children• Low divorce rate: 20%• Saved as much as they could• Believed in traditional insurance
products and trusted their agents• Currently age 91+
© 2016 National Association of Insurance Commissioners
The Silent Generation• Born 1925-1944• Born into a time of crisis: Great
Depression and WWII• Younger members grew up in the
50s• Compliant; honored their elders
and loyal to old institutions• Average of 3.3 children• Wanted a different childhood for
their kids• Learned how to save from parents• Currently aged 71-91
© 2016 National Association of Insurance Commissioners All Rights Reserved 10
© 2016 National Association of Insurance Commissioners
Baby Boomers
• Born 1945-1964
• Also called the “Me” Generation
• Grew up with, but rejected their parents’ traditional ways
• Average of 2.0 children
• 40%+ divorce rate
• Redefined retirement
• More likely to view insurance products as investments
• Currently aged 51-71
© 2016 National Association of Insurance Commissioners
Generation X
• Born 1965-1980• The MTV Generation• Grew up during prosperous times• First generation of divorced parents• First to use PCs• Average of 2.0 children• High rate of single parenting• “Helicopter Parents”• Out-earned parents, but saved less• Don’t believe that Social Security will be
there for them• Currently aged 35-51
© 2016 National Association of Insurance Commissioners All Rights Reserved 11
© 2016 National Association of Insurance Commissioners
Generation Turnover
54
56
58
60
62
64
66
68
70
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1989 1992 1995 1998 2001 2004 2007 2010
LTCI Issues by Generation and Average Issue Age by Year
GI Generation Silent Generation Baby Boomers Average Issue Age
Source: 2000-2011 SOA Long Term Care Intercompany Experience Study and AHIP: Who Buys Long-Term Care Insurance in 2010-2011
© 2016 National Association of Insurance Commissioners
Buyer Statistics
0%
10%
20%
30%
40%
50%
60%
70%
80%
Someone in Household Working
1995 2010
• Lower Issue age in 2010
• Baby Boomers working longer than the Silent Generation
Source: AHIP: Who Buys Long-Term Care Insurance in 2010-2011
© 2016 National Association of Insurance Commissioners All Rights Reserved 12
© 2016 National Association of Insurance Commissioners
Buyer Statistics
• Inflation partially accounts for shift (71%)
• Rest likely driven by big drop in retiree purchasersSource: AHIP: Who Buys Long-Term Care Insurance in 2010-2011
0%
10%
20%
30%
40%
50%
60%
70%
80%
Less than $20,000 $20,000-$34,999 $35,000-$49,999 $50,000+
Income of Individual LTCI Buyers
1990 2010
© 2016 National Association of Insurance Commissioners
Buyer Statistics
Education Level of Individual LTCI Buyers
Less than High School
High School Graduate
Post High School
College Graduate
Source: AHIP: Who Buys Long-Term Care Insurance in 2010-2011
Boomers are more likely than Silents to have college degrees
1990 2010
© 2016 National Association of Insurance Commissioners All Rights Reserved 13
© 2016 National Association of Insurance Commissioners
Buyer Statistics
Source: AHIP: Who Buys Long-Term Care Insurance in 2010-2011
0%
5%
10%
15%
20%
25%
30%
35%
AvoidDependence
Protect Assets GuaranteeAffordability
Protect LivingStandards
Reason for Buying LTCI
1990 2010
Motivations shifted to preserving assets and lifestyle
© 2016 National Association of Insurance Commissioners
Transition to Hybrid Products
0
500
1,000
1,500
2,000
2,500
3,000
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
New Premium by Calendar Year ($millions)
Stand-alone LTC Combo LTC
Sources: 2001-2014 Broker World Surveys and LIMRA’s Individual Life Combo Products Annual Reviews
• Shift to hybrids correlates to shift to Boomers as purchasers• Important to note that much of hybrid premium is single pay
© 2016 National Association of Insurance Commissioners All Rights Reserved 14
© 2016 National Association of Insurance Commissioners
Hybrid Product Sales
Hybrid products comprised of new life insurance premium issued in
100,000 policies and $2.4 bn issued in 2014
Compared to 130,000 policies and $330m in the Traditional LTC market
Carriers are entering the hybrid LTC marketas opposed to continued exits in the Traditional LTC market
12% 2014
© 2016 National Association of Insurance Commissioners
Hybrid Product Appeal
Customers:
• Easy to understand: Access to a pot of money (death benefit)
• Cost effective: Add-on premiums are generally less than stand-alone
• Equity exists in base product’s account value
Carriers:
• Mitigated risks:
– Exposure limited to life policy net amount at risk
– Insured’s equity in base coverage acts like a “co-pay”
– Low mortality offsets life insurance risk
• Easy to distribute:
– “Add-on” to the base policy sale; can be sold by broad distribution
© 2016 National Association of Insurance Commissioners All Rights Reserved 15
© 2016 National Association of Insurance Commissioners
Are Hybrids the Answer?Still gaps that can be filled…
Customers:
• Not always interested in combining with life insurance
• Simplified purchase
• Modular solutions
• Flexibility of benefits as care delivery evolves
Carriers:
• “Better box” or eliminate long-termenvironmental risks:
– Interest rates
– Declining mortality rates
– Disability incidence
– Evolving care delivery
© 2016 National Association of Insurance Commissioners
Future Changes in Care Delivery
• Generation receiving care will start to flip to Baby Boomers
• Ratio of care givers to care receivers will drop dramatically
• Both will drive changes in care deliverySource: US Census Bureau 2015 Projection Population
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
1990 2010 2030 2050
Rat
io o
f ca
reg
iver
s to
rec
eive
rs
Who Will Need LTC & Available Resources
WWII Generation
The Silent Generation
Baby Boomers
Generation X
© 2016 National Association of Insurance Commissioners All Rights Reserved 16
© 2016 National Association of Insurance Commissioners
Generational Comparison – Baby Boomers
Boomers will live longer, but are generally less healthy
56
58
60
62
64
66
68
70
72
74
76
78
Silents Boomers Gen X Mills.
Life Expectancy at Birth
0%
10%
20%
30%
40%
50%
60%
70%
80%
Hypertension Hyper-cholesterolemia
Diabetes Obesity
Health Risks by Generation
Silents Boomers
Source: CDC National Center for Health Statistics and The Journal of the American Medical Association
© 2016 National Association of Insurance Commissioners
Generational Comparison – Baby Boomers
Source: CDC/NCHS, National Health Interview Survey, 1997–September 2015, Family Core component.
5.4%
5.6%
5.8%
6.0%
6.2%
6.4%
6.6%
6.8%
7.0%
7.2%
7.4%Pct of Persons 65+ Needing Help with Personal Care
Percent of Adults 65+ Needing Care 4 Year Moving Average
© 2016 National Association of Insurance Commissioners All Rights Reserved 17
© 2016 National Association of Insurance Commissioners
Current Care Landscape• Who:
– Recipients: Silents
– Informal caregivers: Boomers
– Formal caregivers: GenXers
• Generational dynamic:– Silents accept how things are
– Do not want to burden children
– Children are busy and mobile
– Will endure social isolation
– Low tech, inefficient health system
• Where:– At home
– Assisted living facilities
– Nursing homes
© 2016 National Association of Insurance Commissioners
Emerging Care Landscape• Who:
– Recipients: Boomers
– Informal caregivers: GenXers
– Formal caregivers: Millennials
• Generational dynamic:– Boomers will demand change
– Will not expect help from children
– Will not tolerate isolation
– Will want to keep their toys
• Not “Where” but “How”:– Emerging tech deployed
– At home via “smart homes”
– More efficient, less labor intensive
– Lifestyle preservation “places”
– Amenities, mobility, social interaction
© 2016 National Association of Insurance Commissioners All Rights Reserved 18
© 2016 National Association of Insurance Commissioners
What are We Trying to Insure?
A closer look at persons that need care….
• Averages for persons aged 80+– Net worth: $275,000 including $135,000 of home equity– Annual income: $22,000
• Average annual nursing home cost: $81,000• Average income shortfall ~ $60,000• Average time to exhaust assets:
– Out of cash in about 2 years– Burn through home equity in another 2 years
• Many panic and begin Medicaid planning
Isn’t this really a lifestyle preservation risk?
© 2016 National Association of Insurance Commissioners
What if We Focus on Lifestyle Preservation?
At the point of needing care…
• Care Annuity (UK version of LTC insurance)– Underwritten SPIA issued to newly disabled persons
– Health conditions result in higher monthly benefit payments than traditional SPIAs
• 2 year life expectancy for nursing home entrants
• $120,000 gets you $60,000 per year for life instead of $12,000
– Removes longevity risk for the annuitant
– Means that people just need to have enough assets to fund an average stay for persons with similar health conditions
– Most 80+ year-olds have enough assets to do this
Two U.S. carriers currently sell this product
© 2016 National Association of Insurance Commissioners All Rights Reserved 19
© 2016 National Association of Insurance Commissioners
What if We Really Changed Our Thinking?
From selling pre-defined benefits to contribution-based products?
• Deferred annuities that are designated to fund Care Annuities– Lump sums or periodic deposits
• Simple, modular and flexible for the customer– Put in what you can when you can– Stop whenever you want; if you don’t use it, you keep it
• Elimination of long-term environmental risks for the carrier– Only need to price for longevity of cohorts as they become disabled
If we could only change some laws…
• Pre-tax contributions that are not taxed if used for LTC?• “Term LTC” insurance while account builds up?• Lever-up account balance if LTC is needed?
© 2016 National Association of Insurance Commissioners
Signs of Hope
• Regulators / legislatures are receptive– Increased understanding of legacy block issues
– Increasing pressure to solve the Medicaid LTC crisis
– Understand the need for new solutions
– Asking for industry input: What laws should we change?
• Carriers are evaluating market entry (and re-entry)– See an opportunity for an “against the grain” play
– Want to sell a new value proposition
– Looking for ways to distribute new product concepts
• Will someone from outside the industry leapfrog us?