US insurer casts off Long Term Care policies

A major US insurer has dumped most of its long term care policies into an independent trust, putting tens of thousands of American policyholders at risk of reduced benefits or big premium increases.

The insurer, one of many US ones with financial problems, said that the 140,000 policies were a drag on the company's earnings because they were under-priced and required continuing capital infusions to meet the long term needs of policyholders. This company took the premiums and promised people independent living in their golden years, and they have kicked them into touch. Other financially troubled insurance companies are likely to set adrift long term policies.

Long term care policies help defray nursing home or assisted-living costs. About eight million Americans now own one. Most of the policies are purchased by people in their 50s and 60s for protection against claims that may not occur for decades.

Early versions of long term care insurance policies were introduced in the 1970s, and by the early 1990s more than 100 companies were offering them. But some of the insurers' assumptions turned out to be wrong, leaving policies under-priced and a drag on their finances. Early purchasers lived longer, generated higher medical expenses and terminated fewer policies than insurers anticipated. As a result, some insurers have had to raise premiums many times on policies that were supposed to be stable in price.

The insurer action comes at a time of growing concerns about whether many long term care policies will pay off when needed, or will require drastic premium increases. Now, the industry's under-pricing woes are being exacerbated by the financial crisis. Insurance company investments have done poorly, and in some instances the insurers are having trouble raising more capital to meet the reserve and capital demands of regulators.

So why should we care what is happening in the US?

The first message to UK buyers of long term care policies is to take particular care in picking out a financially stable insurer, perhaps examining its financial statements as well as its ratings, and check as well into its record of premium increases.

Just like the US, a rash of insurers, many now long-gone, jumped into the long term care market from the 1970s to the 1990s. Most sold few policies and saw the cost of care rising way above expectations. Also, customers lived longer and needed more care than predicted. The result was that almost every insurer pulled out of the market.

Again, this would seem only of historic interest, or maybe not. A few weeks ago, in an excess of mutual backslapping, the government and an insurance trade body suggested that private insurance could be a solution to the government’s prediction of ever increasing costs of care for the elderly.

The government would love to dump the problem on insurers and the public. The trade body glories in being high profile, to stop others following the first ever member insurer to quit. There is, however, one huge snag. None of the insurers who left the market show any remote interest in coming back. No other life or health insurers want to jump into the market. Intermediaries are far from convinced that long term care policies as an investment for future care which you may or may not need, are good value. When you are predicting what may happen in ten to fifty years, it is hard to even predict if the insurer will still be there.

Solving a social problem with an investment-linked insurance rarely works.

Long term care: 3 December 2008