THE BAD LONG TERM CARE INSURANCE “PHYSICAL”

Long Term Care InsuranceI learned a great deal from a phone call recently with an experienced vice-president of a major long term care insurance carrier.

As you are probably aware, current traditional long term care insurance products are not selling very well. LIMRA results show that individual long term care insurance premium decreased 22% in 2014, which followed a 28% decrease in 2013. Sales are down a staggering 70% from their peak in 2004. It has taken ten years for the industry to fully recognize that it has a major product problem…boy have we been slow to wake up!

The long term care insurance industry has sought to become more profitable for many years. It has done so mainly by raising premiums with little corresponding increase in benefits. This seemed to be the obvious road to profitability and the preferred choice among other alternatives. The insurance is sold, not bought, so there was little appetite to reduce commissions, although that is beginning to happen now. The administrative costs are complex and in need of constant technology enhancements in order to increase efficiencies. Some of these costs have to be amortized over many years. There is also a great deal of human involvement with claims and policy service, and those costs have risen over time. So if you can’t change commissions much, and your administrative costs are rising, and your labor costs are rising, you have to increase revenue in order to become more profitable.
Premiums have in some cases tripled in the last twenty years. The premium increases have occurred for a host of reasons, among them that most people get sick when they get old. Consequently, there is over utilization of the benefits and for longer periods of time than was anticipated. This is the scary variable for the insurance carriers, as they cannot predict future morbidity costs with any degree of certainty. However, the average sale for long term care insurance has risen at the slow rate of 1% per year. That’s price resistance, folks! The consumer has shown little interest in paying high premiums for long term care insurance.

The result has been a sort of a death spiral. Premiums have risen well beyond the willingness of most folks to believe that they can afford them, whether they can or not. Sales have tanked despite the aging of the baby boomers and their increasing need for protection.

Let’s go back to the phone call with the carrier vice-president. She used a metaphor which I believe is spot-on. She said that our industry has experienced a great deal of stress, and isn’t feeling very well. It finally decided to have a “physical examination”, way later than it should have. Unfortunately, the exam revealed some significant disease which was the result of not taking care of oneself. Things like high blood pressure, diabetes, and an increasing amount of depression…conditions which could lead to heart attacks, strokes, and premature death if not treated.

That’s what happens when you ignore your body signals and do things that abuse your body… eating too much meat, potatoes, pasta and sweets, not watching your weight, not exercising moderately, not getting enough sleep, etc. You wind up with disease.

We should have known better, but we went on thinking that we could solve our problems merely by raising premiums and increasing profitability, at least on paper. Of course, it’s fairly easy to have sales without profits, but you can’t have profits without sales. The industry is just in the process of figuring this out. The result is that we now have neither sales nor profits.

We are finally listening to the doctor. It’s time for some strong medicine and some serious changes in our habits in order to cure our disease.

Finally, the long term care insurance industry is waking up. It has now concluded that past policy structures with increasing rates won’t work. It is creating new “prescriptions” to treat its illness. Lots of innovative products are being filed with lots of new ideas. The main thrust is to lower premiums. There is a variety of new prescriptions. What are they? My next blog will discuss them.