Last week Genworth announced a series of claims reserve actions that caused its stock price to tumble and then rebound slightly. After reading the reports and attending a conference call with Genworth Senior Management on Friday, I can tell you not to panic. However, this change of course by the nation’s leading writer of traditional long-term care insurance should cause us to reflect on our assumptions about long-term care planning. It also makes sense to review our efforts as insurance advisors to help our clients create sufficient liquidity to pay for care.
My first impression is that Genworth acted responsibly in reviewing and bolstering its claims reserve by $345 million. They are also committed to staying in the long-term care insurance business. Both of these facts should reinforce broker and consumer faith. Let’s remember that less than three years ago, UNUM withdrew from the long-term care insurance market when faced with the same need to restate its reserves for claims payment. Genworth’s revisions assure policyholders that adequate reserves exist to pay their claims. Actively continuing to sell traditional LTCi means newer and more profitable policies will reinforce and ultimately replace older and less profitable blocks of business.
Here are some of my key takeaways from last week’s announcement:
- The reserve action applies to 50,000 policies currently on claim;
- Higher than anticipated length (duration) and amount (utilization) of claims are cited as primary reasons for the action;
- The new claims data is an update of a “deep dive” into claims results completed in 2012;
- Policies impacted most were issued prior to 2002;
- The extended low-interest-rate environment continues to be a significant factor in creating the need to bolster claims reserves;
- Policyholders are living longer than originally anticipated (on and off claim) and policy lapse rates continue at less than 1%.
Considering all this, I would expect a quickening pace of in-force premium increases on policies issued prior to 2002. However, before you start hyperventilating, allow me to reiterate some important points:
- Based on this claims review, anticipated increases are justifiable;
- Policyholders with these older policies have been paying premiums far below what they should have been paying for many years;
- Thus they’ve had the advantage of rich coverage and the time value of money;
- Experience tells us that if a consumer could qualify for a new policy today at their current age, the premium would be considerably higher than what they’ll pay after they receive an in-force premium increase.
Some issues to consider pertaining to newer blocks of long-term care business are:
- The impact of more rigorous underwriting;
- Effect of more policyholders purchasing inflation protection;
- Fewer policyholders with lifetime benefits.
How might this effect the traditional long-term care insurance industry as a whole? My guess is that other insurance companies will take a new look at their claims experience and adjust accordingly. Their reactions in this regard may or may not be revealing. I do continue to believe that we have a core group of carriers committed to traditional long-term care insurance, provided they can profitably manage their risk. State departments of insurance and interest rates will be key factors in this calculus.
All this being said, I will echo Genworth senior management’s belief, that for consumers, the long-term care risk is not going away. Providing liquidity solutions for long-term care planning is critical to our society, and I believe Genworth is committed to being an industry leader in this arena. This does not mean that they or any company is going to get it right 100% of the time.
We as agents and advisors need to be realistic; we’re dealing with an accident and health insurance product. Compare the rate increases consumers receive annually on their medical and Medicare supplement insurance policies (not to mention policy cancellations and benefit reductions caused by the ACA) to the in-frequent in-force premium increases on traditional long-term care insurance, and I think you can achieve some perspective. I’ll also remind you that millions of dollars of long-term care insurance claims are being paid daily by numerous companies, relieving the financial and emotional burdens of countless Americans.
It’s not time to panic or to throw in the towel. If you’ve been selling long-term care insurance, be proud of the good work you’ve done. If you’re concerned about going forward, be glad we have responsible insurance companies who are taking appropriate actions to assure our policyholders that the promises that you and they have made, are kept.