As large long-term-care insurance sellers like John Hancock and Genworth both pursue rate hikes, one analyst says advisers should brace themselves for even more to come.
Premium rate increases on existing business are just around the corner for the two largest sellers of long-term-care insurance.
Manulife Financial Corp., the Canadian parent of John Hancock Life Insurance Co., said it will be filing requests with state insurance regulators to raise premiums on half of its in-force business by an average of 25%. The carrier released the news in its third-quarter earnings report last Thursday, when it reported a $12 million charge after a review of John Hancock's long-term-care business in the U.S. Factors behind the charges included updates to mortality and morbidity assumptions, which led to the decision to seek premium increases..
This latest rate increase comes three years after the insurer had asked regulators in the U.S. for rate hikes averaging out to 40%.
Currently, a 60-year-old couple purchasing a long-term care policy that will provide them with a combined pool of $708,000 at age 85 can expect to pay on average $3,700 in annual premiums, up 11% from two years ago, according to the American Association for Long Term Care Insurance. The range of the coverage cost was as wide as $2,700 to $4,500 per year.
John Hancock isn't alone in stepping up those rates: Tom McInerney, chief executive of Genworth Financial Inc., also said on a third-quarter conference call that the company has started filing for rate increases of 6% to 13% on the in-force business that was purchased between 2003 and 2012.
“These policies are still profitable, but there's a need for more moderate rate increases to bring them back to the original pricing assumptions and to potentially avoid the need for much larger rate increases in the future,” Mr. McInerney said on the Oct. 30 call.
The insurer is seeking “significant premium rate increases” on blocks that were written by Genworth prior to 2002, however, “to bring them closer to a break-even point over time, and reduce the strain on earnings and capital,” he said.
“John Hancock's claims experience indicated the need to increase rates on certain of our individual policy series,” said the insurer's spokeswoman, Melissa Berczuk. “Many carriers have had similar claims experience. Some have increased premiums, and some have chosen to leave the LTCI market.”
She added that policyholders receive advance notice of the rate hike so that they can make informed choices about their planning, and that the insurer will offer options to either mitigate or eliminate the increase.
Brace yourselves for more rate hikes, noted Laura Bazer, vice president and senior credit officer at Moody's Investors Service.
Though companies like MetLife Inc., Prudential Financial Inc. and Unum Group have exited the business, the real problem is the business that's been written over the course of the last two decades.
Genworth and John Hancock are still in the business, representing 23% and 16% of LTCI market share, respectively, in 2012, according to Moody's Investors Service.
At the heart of the issue is the fact that more people than the carriers anticipated are keeping their long-term-care policies. Low interest rates also don't help because insurers use the return they earn on their bond portfolio to help pay claims.
“Basically, the companies assumed there would be more lapses,” said Ms. Bazer. “As the business blocks age, people get older and apply for benefits. More people are applying for those benefits than expected, and people stay on longer than anticipated once they get those benefits.”
Indeed, advisers and insurance agents alike are reporting that clients are sticking through those rate increases. They are either shelling out more money for the coverage or deciding to cut features on their policies, such as inflation protection, in order to keep costs down.
“We've had the discussion [of how to proceed during a proposed rate hike], but we've never had someone who drops the coverage,” said Gregory L. Olsen, a partner at Lenox Advisors. “The alternative is to either go back to the marketplace or go without coverage. The worst thing is realizing you may need it, and then you don't have it.”
Risks come with a company's request for higher rates. For instance, regulators might deny approval, as seniors would be footing the bill. Further, the healthier policyholders may let their policies lapse and put the book in danger of ending up loaded with sicklier clients who are most likely to file claims and spur higher costs, Ms. Bazer noted.
Experts blame insurers' inexperience when they came up with these products. “With LTC, these mispricings are proving difficult to fix,” Ms. Bazer noted. “For this reason we expect rate hikes to continue among the LTC industry's key players.”
