What Went Wrong with Long-Term Care Insurance?

Long-term care insurance information, form, Folders and stethoscope.

Long-term care insurance information, form, Folders and stethoscope.

by James A. Bacon

I am one of those schlubs who takes out insurance policies to protect against bad things happening. One eventuality I worry about is the need for long-term care. The longer you live and the more chronic conditions you develop, the greater the odds – about 50/50 for a 60-year-old today — that you’ll wind up bed-ridden at home or in a nursing facility. Feeling strong and fit at 53 when I took out a policy ten years ago, I was betting that I’d live longer than the average Joe and be more likely than not at some point in my life to benefit from having insurance. Signing up at a relatively young age would lock me in at an affordable rate. Or so I thought.

About two months ago I received a letter from my insurer, New York Life Insurance Company, informing me that my long-term care policy, which had remained stable ten years, was scheduled to increase 20%, costing me, in rough numbers, an extra $300 per year after a three-year phase-in. Three hundred bucks won’t bust the Bacon bank, but I was miffed — it was the principle of the thing. I had not been led to understand that my insurance rate would go up. And I bet there were other policy holders for whom $300 per year would cause real hardship.

Well, a look at my insurance policy indicated that, sure enough, New York Life was entitled to raise my fees. My bad. I should have read the fine print. Even so, any rate increase had to be approved by Virginia’s Bureau of Insurance, and I wondered — as I suppose an estimated 80,000 other long-term care insurance policy holders are wondering — what is the justification for jacking up our rates?

The letter referred vaguely to “longer life expectancies and an increased need for long-term care benefits.” Did the insurer mean to tell me that the people who are the world’s experts in demographic trends failed to anticipate that life expectancies would increase? And they miscalculated what percentage of the population would need long-term care? Really? That sounded lame to me, and I wondered if there was more to the story. In particular, I wondered if years of Quantitative Easing and low interest rates had depressed New York Life returns on insurance premiums below what the company had anticipated when it formulated the rates ten years ago. Could my higher insurance fee represent another $300 a year in tribute to Uncle Sam, just one of many ways in which low interest rates are invisibly transferring wealth from American citizens to its grotesquely swollen and indebted government?

One of the advantages of being a blogger is the ability to pick up the phone and call anyone with a decent chance that someone actually will answer. When I called New York Life to find out what the heck was going on, company spokesperson Terri Wolcott put me in touch with Aaron Ball, vice president and head of the Long Term Care business, who, as coincidence had it, lives in good ol’ Richmond, Va.

Low interest rates were a factor in the rate increases, Ball says, but not a decisive one. He candidly admits that the industry screwed up key underwriting assumptions.

We Underpriced the Policy. Sorry about That.

“When you apply for coverage, it can be 20, 30 or 40 years before you make a claim,” says Ball. “We set up reserves to pay claims 20 to 40 years in the future. We’re earning interest on those investments, and we assume what those interest rates will be.” Ten years ago, carriers were assuming earnings in the 5% to 6% range (conservative assumptions that were lower than what most pension funds were assuming at the time). “Today, they’re assuming in the 3% to 4% range. The low interest rates have put pressure on the portfolios.”

Higher returns on the company’s investment portfolios might have offset the negative experience, tempering the need for a rate increase, Ball says, but the bulk of the blame goes to actuarial miscalculations regarding other key variables.

Morbidity. The first the key variables is morbidity — how sick will policy holders get, and what will be the appropriate venue for treating them? When projecting 40 years into the future, getting this assumption correct can be harder than it looks. The things that put people into long-term care change over time. Ten years ago, frailty issues predominated — hip fractures, cardiovascular problems, and the like. Today, the driver is cognitive claims — Alzheimers and other forms of dementia. Also hard to predict is the setting in which people will be given long-term care. “Back in 1988, there was no such thing as an assisted living facility,” says Ball. As it turned out, New York Life’s morbidity assumptions were close to the mark. Other insurers got these assumptions wrong, and they’ve had to make upward adjustments in their premiums.

Voluntary lapse. When people buy policies, some continue to own the policy and eventually collect benefits, while others let their policies lapse voluntarily. The “lapsers” pay premiums that don’t get refunded, effectively underwriting the cost of the policy for others. When long-term insurance was getting off the ground about 20 years ago, there was no basis for determining how many policy holders would let their policies lapse, so carriers made the best guess they could. In most cases, those guesses were wrong.

New York Life assumed in pricing its premiums that policies would lapse at an annual rate of 2% after four years, but actual experience showed that the rate trended downward to about 0.5%. More people hung onto their long-term care insurance policies than the company expected.

Mortality. The rate at which policies lapse due to the policy holder’s death is another major variable. “We now expect twice as many people to be alive at age 90 compared to what was assumed when the product was priced,” says Wolcott. “Longer life expectancies generally result in additional claims because more people utilize long-term care services at older ages.”

The explanation made sense. I didn’t like it, but it made sense.  New York Life blew two of its key assumptions (though not as badly as many other insurers did) and low interest rates depressed investment turns. Accordingly, to maintain the actuarial viability of the policies, the company had to jack up rates.

But the explanation raises a new set of questions. If policy holders sign a contract with an insurance carrier to provide a certain set of benefits for a certain price, why isn’t the carrier obligated to eat the difference when they make bad decisions? I’ve never heard of carriers filing to reduce premiums if their assumptions turn out to be too optimistic. Maybe it happens, but I haven’t heard of it. No, they keep the profit. Given the way the incentives are structured, aren’t insurance companies encouraged to low ball premiums, knowing that they can come back later and jack up rates?

So, Where Was the SCC?

approved_rate_increasesWhere was Virginia’s State Corporation Commission in all this?

New York Life is hardly the only insurance carrier to ask for higher rates. The Bureau of Insurance has approved 22 rate increases by 12 different companies affecting nearly 16,000 policy holders. Another 35 requests affecting 65,000 policy holders are pending. Two companies are asking for 121% rate increases — more than double!

The Bureau has seen the problem coming for several years now. A March 2015 SCC order alludes to a 2012 report that noted the increase in the number and frequency of long-term care insurance premium rate increase requests. A 2013 report identified the lack of experience data, including changes in expected mortality, lapse rates and claim costs when the policies were formulated as driving factors behind the rate increases. “There would be no easy regulatory solution to this problem,” the report concluded, “and … any changes to the regulatory framework would require balancing multiple interests, including consumer protection and insurer solvency.”

Comments from 171 Virginia residents emphasized the “frustration and hardship felt by many long-term insurance policyholders… as well as their fears about the possibility of experiencing further rate increases in the future.” Policy holders felt it unfair that they would have to bear the burden of pricing errors made by the insurers, and they complained about the lack of transparency surrounding the rate increases and rate filings.

About thirty years ago, at the behest of the General Assembly, the Bureau of Insurance had adopted the National Association of Insurance Commissioners model legislation governing long-term care insurance.  In 2000, Virginia adopted “rate stabilization” revisions to the rules that resulted in higher initial premiums and lower and less frequent subsequent rate increases.

The SCC’s 2015 order increases the consumer protections even more. Says SCC spokesman Ken Schrad: “At least 80 cents of each dollar in premium increase must be paid out in claims on an individual policy and 75 cents of each dollar in premium increase must be paid out in claims on a group policy.”

Wrote the SCC in that order: “While the Bureau’s proposed amendments to the Rules will not eliminate long-term care insurance premium rate increases, such proposed amendments adopt a more conservative approach for the initial pricing of long-term care policies, require insurers to take a more active role in managing long-term care insurance rates, and provide additional and necessary protections to long-term care insurance policyholders in Virginia.”

Bacon’s Bottom Line

I have no doubt that there is a delicate balancing act between protecting policy holders and ensuring insurers’ solvency. If you’re worried about policy holders getting the shaft, nothing could be worse than allowing a carrier to slip into insolvency unable to make good on any of its promises. I also recognize that regulators had no more experience than the carriers did when launching a brand new insurance product, so it was difficult to second-guess industry decisions. So, I’m mildly sympathetic to the position of the regulators, who have made appropriate adjustments over time.

However, it strikes me that something was severely askew with rules that resulted in insurance carriers in Virginia under-pricing 57 long-term care policies and, judging by the lack of any filing to lower rates, for zero to over-price them. I can assure you that the insurance agents selling these policies did not inform policy holders, “Gee, we’re really not very experienced at setting rates, and our assumptions could prove invalid, and if they do, we have the right to jack up your rights as much as we need to.”

The state of Virginia provides state tax credits for long-term care insurance premiums. The idea is to encourage Virginians to protect their retirement assets rather than fall back upon Medicaid to pay for their care. Some 80,000 Virginians went along, playing by the rules and doing the right thing. In the end, the insurance companies were protected from their mistakes, the federal government got rock-bottom interest rates that allowed it to continue running huge deficits while depressing insurance company portfolio returns, and thousands of Virginians got stuck with higher premiums. Their choice: either drop out and lose the money they have paid in, or suck it up and eat the new rate. Is there any wonder that Americans believe the system is rigged in favor of the powerful against the little guy?

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20 responses to “What Went Wrong with Long-Term Care Insurance?

  1. It’s a competitive business; who wants to set a price that is too high to attract customers?

  2. You know , for a guy who opines often and long about the “free market” and bad bad govt and regulations – I must say I’m amused here.

    You’re wanting the govt to tell these companies how to do business?

    you want the government to REGULATE instead of letting the free market decide the price and what you get for that price?

    holy flying cows with wings – bat crap!

    where did the “get the govt out of insurance and let the free market compete” idea go to?

    you want the govt to make the insurance companies not “jack up” your rates ?

    Next thing, I suppose, you’d want govt to force them to pay off when you collect?

    good gawd Bacon – I thought you were a libertarian … I suspected lite/faux but this is ridiculous – you sound like one of those whining nanny-govt-loving leftists!

    good lord!

    • Larry, the state of Virginia has been regulating the insurance industry for… I don’t know… maybe a hundred years. I could write about the need to roll back that regulation, in which case you would call me a wingnut, or I could write about working within existing institutions such as they are.

      That’s the way it works, doesn’t it? If I get too zealous with my libertarian principles, you accuse me of being a whack job. And when I back off those libertarian principles, you accuse me of inconsistently applying those principles! No matter what I say, you’ve got a rationale for saying it’s wrong!!

  3. No Jim. You make the free market argument for health insurance – you say get the govt out of health insurance – then you turn around and want the govt to regulate long term care insurance.

    got a reason why you have two different views?

    what’s your rationale for regulation and free market when it comes to insurance?

  4. You have not advocated for repeal of COPN ?

    you have not advocated for letting the free market determine health care prices?

    do you really want me to go back through BR and pick those words?

    come on Jim – you’ve have long argued that it’s govt regulation that has caused increases in the price and availability of health care.

    fess up guy or I WILL go get the words!

    • Larry, this is a bizarre conflation of issues. It makes no sense at all. There is no connection between any of the things you’re talking about here.

      • Jim – there is no conflation at all.

        You have advocated for some time that health insurance would be better suited if there was less govt involved and more free market – that the free market would .. in your words – ” Promote the right kind of insurance competition. State and federal mandates of insurance benefits must stop, and people must be allowed to acquire insurance that fits their needs and their budgets.”

        Now you seem to be saying something very different and seem to want the govt involved in controlling the insurance companies rather than doing what you’ve said before – get rid of regulation – and let competition drive the market.

        so which is it?

        I have one view by the way – always have – that regulation is required or else bad actors will gladly sell you totally bogus insurance unless the govt stops them.

        I think that about ALL kinds of insurance, whether it’s health insurance or long term care insurance or other kinds

        so I’m curious where you draw that line – if you have a consistent view about it.

        should the govt regulate insurance?

        simple question – nothing bizarre about it..

        meaty subject for BR…

  5. ” Promote the right kind of insurance competition. State and federal mandates of insurance benefits must stop, and people must be allowed to acquire insurance that fits their needs and their budgets.”

    want more?

    you gotta come clean here, guy.

    give us a clear statement of your view on the govt, regulation and insurance.

    thanks

  6. “Is there any wonder that Americans believe the system is rigged in favor of the powerful against the little guy?”

    No, there is no wonder. There is absolute certainty. So be among the powerful if you can….. Although in this case you admit the company never promised you a guaranteed rate and you should be the first person to spot Rosie Scenario when you see her. When Boomergeddon comes millennials will be running around pulling the plug on all of us anyway. No way they will pay to keep us geezers breathing and eating and streaming reruns in nursing homes….

    Larry may have you on this one, Jim. About the only thing I want the government to do, as a free market man myself, is to make sure contracts are honored and that the insurance companies tell the truth about risk to their customers. Those are proper roles for government.

    • Steve – the concept of insurance especially long term care is not about Millennials – it’s about the “pool” of people who have purchased that insurance.

      No one else – outside of the insured pool has any role in it.

      there are similar issues with private sector annuities – and even public sector annuities – that also are affected by interest rates and actuarials.

      And to go one step further -actuarials also affect – Social Security.

      neither public nor private sector are immune from it and yet when the private sector changes the cost – Jim thinks the govt should be involved in the decision!!!!!

      The very same folks THEN will castigate the govt for not making sure that public sector pensions and Social Security do not have “unfunded liabilities”.

      Now Medicare – yes – the Millennials will have a role and not the least of is why we sell health insurance to those over 65 for $122 a month when they have incomes of 85K and own 2 houses and 4 cars… with the Millennials picking up the tab – that’s going to change and as it does, no doubt we will hear that the Govt is “rationing health care” and convening “death panels”. I guarantee it.

    • I agree. The contract contained terms that allowed the insurance companies to raise rates. The insurance companies presented enough evidence to justify the rate increases to the SCC. From the justifications provided, it sounds like insurance company assumptions were incorrect about a new product. I’m not really detecting any malfeasance on the part of the insurance companies or SCC in this matter. But maybe I’m missing something.

      • I’d also add that the system is not “rigged” except to the extent that the “marketization” of America has made it “rigged.” As I’ve posted before, the right became obsessed with everyone owning equities and making retirement “private”. They did this at the behest of their corporate masters.

        Now we have a system in which policy makers: Congress, the administrative branch, the Fed, etc. HAVE to make every policy decision with an eye toward maximizing equity returns.

        And. let’s face this fact, the same assumptions that have crushed the long term care insurance market are exposing 401ks as completely inadequate. Yes, if Americans were living to be 68, the idea of retiring at 65 and living 3 years on the average 401k (about $110K) makes sense. But living til your late 70s, early 80s? Only the top 5 percent are probably going to make it with the 401k structure. Just a fact. So if the system is “rigged” it’s a product of “free market” reforms that have created an absolute disaster in the coming years as people live longer. Again, every single policy decision going forward is going to be geared towards maximizing equity returns, so in that sense, yes the game is “rigged” towards discounting other policy considerations in favor of making sure the Dow goes up.

        But the right wants everyone to take their eyes off this absolute farce, and instead points to the amorphous “gov’t” and says, “See, these guys are bad. Boomergeddon, don’t you know.” All the while, Wall Street laps it up and laughs.

  7. “Mortality. The rate at which policies lapse due to the policy holder’s death is another major variable. “We now expect twice as many people to be alive at age 90 compared to what was assumed when the product was priced,” says Wolcott. “Longer life expectancies generally result in additional claims because more people utilize long-term care services at older ages.”

    The explanation made sense. I didn’t like it, but it made sense. New York Life blew two of its key assumptions (though not as badly as many other insurers did) and low interest rates depressed investment turns. Accordingly, to maintain the actuarial viability of the policies, the company had to jack up rates.”

    So, you now believe that people are living longer? I thought the Congress and big media were forcing millions to premature deaths because of Doritos…….

    • Rowinguy! Have you joined forces with LarryG? It is perfectly possible for (a) people to be living longer overall, and (b) certain categories of people, such as those with radically different types of diets, to show differential rates of mortality. No contradiction at all!!

      • I just call them as I see them, as you do, Jim. I don’t see any evidence to support your assertions that Congress or the federal government has forced food processors, either through legislation or “brow-beating,” to make unhealthy foods that Americans are powerless to refuse to eat, thereby leading to the untimely deaths of millions. Big Food makes what sells.

        I do see a point that persons who can afford long term care insurance may constitute a different demographic that may have a different diet that may contribute to longer lifespan. May, may, may is different from is, is, is.

        But mainly, I just thought it funny that in the span of 2 or 3 posts you pirouetted from “big government enforced diet is killing us prematurely” to “why didn’t big government realize we were living longer” and price out insurance more accurately.

  8. ” Even so, any rate increase had to be approved by Virginia’s Bureau of Insurance, and I wondered — as I suppose an estimated 80,000 other long-term care insurance policy holders are wondering — what is the justification for jacking up our rates?”

    I would think no self-respecting libertarian would be advocating that the govt decide what the price of a product should be or be able to go tell a company what the price of a product should be nor the terms of a contract for determining the price.

    not that long ago – I read these words:

    ” State and federal mandates of insurance benefits must stop, and people must be allowed to acquire insurance that fits their needs and their budgets.”

    • The LarryG misinformation campaign continues without let-up. The latest: I would think no self-respecting libertarian would be advocating that the govt decide what the price of a product should be or be able to go tell a company what the price of a product.

      If you’re referring to me as the self-respecting libertarian in question, you are wrong in deducing that I think government should decide what the price of an insurance product should be.

      The question I raised — and it was a question — is a matter of enforcing an existing contract in which the price has already been set. Should the government have a role in protecting the consumer against companies unilaterally re-setting the price?

      If you can’t see the distinction, I weep for you.

  9. There are many different types of insurance, and the market dynamics are different for each. It would be idiotic to apply the exact same regulatory regime to each. Only in your mind, Larry, is there any kind of inconsistency here.

    The issue is whether the government should compel people to participate in the market for medical insurance and force them to pay a penalty or tax (depending upon the legal expediency of the moment) if they don’t. Yeah, I have a philosophical objection to the government requiring people to purchase an insurance product they may or may not want to buy, and penalizing them if they don’t.

    The issue with long-term care insurance is totally different. The questions I raised in my post pertain to consumer protection. Insofar as one of the government’s legitimate jobs is to protect people against fraud, there is a legitimate case to be made for certain types of long-term care insurance regulation.

    As I say, the only inconsistency is in your mind.

  10. Not me. you’re the guy who uniformly opposes any/all “govt” regulation. I’ve never seen you make the case for govt regulation – but perhaps you have.

    AND you ALSO have NOT MADE CLEAR – the distinction you are supposedly making – between the different kinds of insurance.

    and NO – you have argued against govt involvement in health care over and above and beyond ObamaCare – you have argued that health care should be done by the free market – which you have advocated would reduce costs.

    when you say protect against fraud – you are advocating FOR govt regulation to protect people from the free market

    why won’t you admit that? that’s exactly what you’re advocating for.

    fraud is a typical and normal aspect of ANY free market.

    Why do you seemingly arbitrarily pick and choose what parts of the free market you want govt to protect you from?

    you say you have a philosophical objection to people being “forced” to participate in a market.

    Have you come out against auto insurance?

    How about Social Security and Medicare Part A?

    How about unemployment insurance?

    What I am pointing out is YOUR lack of consistency in what you claim the free market should do verses govt regulation and you seem to pick and choose without any distinction about criteria.

    You’ve actually argued this:

    ” Get employers out of health care, Eliminate the tax preference for health care insurance purchased through employers. When people see their health coverage paid for by a third party, they don’t care what it costs. Health insurers need to design health plans adapted to the needs of the patients, not their employers. (Rep. Paul Ryan, R-WI, proposes to eliminate the health care tax exemption and to reform Medicare but does not go beyond that.)”

    My question to you is that when you argue this – do you also acknowledge that it’s the Govt that prohibits the employer-provided insurance from denying pre-existing – something the free market would do if permitted?

    do you also acknowledge that it is the Govt that REQUIRES employer-provided to offer one premium price to all in the pool REGARDLESS of their age or health status and in effect “makes people pay” for others who are older and sicker that – if those govt regulations were removed – as they are in a free market – that those who are younger and healthier would pay far lower rates while those who are older and sicker would pay much higher rates even if the insurance companies would OFFER them insurance at all?

    I think that you zig and zag around these issues to suit your own philosophy sometimes – and I call you on it.

    you do not have a consistent – free market standard and your position on long term care illustrates it glaringly.

    You say long term insurance is DIFFERENT therefore it should be govt regulated.

    It’s not really “different” at all. The free market is what allows companies to sell you something and you willingly pay for it.

    what you’re advocating is that you want govt to “protect” you from the things that would occur in a truly free market – for ALL insurance – in terms of what the price is, what is covered or not and whether they pay off in full or not – all issues you see right now today – not only with Long Term but Health insurance, car, homeowners , etc.

    so really you could clear all of this up if you simply admit that you do want the govt to regulate commerce for insurance and in general – to make sure you are not “defrauded” on transactions.

    How about it?

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