Friday, December 9, 2016

No. 191: Long-Term Care Insurance—A Looming Catastrophe

Long-term care (LTC) insurance came on the scene in the 1970s, and by the early 2000s more than one hundred companies were offering it. Now the number is down to a dozen. Two related LTC insurance companies may be liquidated in 2017. In that case, the excess of estimated liabilities over assets would make it the largest failure in the insurance industry since the collapse of Executive Life in 1991.

Here I address some recent events that provide at least a partial explanation of how we reached this point, and describe the failure of the insurance industry and state insurance regulators to address the problem. I also identify what I see as a solution to the problem, but I acknowledge that the solution may not be feasible from a political standpoint.

My first article about long-term care (LTC) insurance appeared in the February 1988 issue of The Insurance Forum. Since then I have written many additional articles on the subject in the Forum, posted several items on my blog, and included a chapter on the subject in my 2015 book entitled The Insurance Forum: A Memoir.

I have repeatedly expressed the opinion that the financing of LTC, although a very serious problem, cannot be solved through the mechanism of private insurance because the LTC exposure violates several important insurance principles. One of those principles is that the probability of loss should be low, but the probability of loss in LTC is high. Another of those principles is that the likelihood of dispute over whether there has been a loss covered by the insurance should be small, but the likelihood of dispute in LTC is large. I first mentioned such principles in the August 1991 issue of the Forum, and I elaborated on them and other principles in the July 2008 issue.

Penn Treaty
Penn Treaty Network America Insurance Company and its affiliated American Network Insurance Company (collectively "Penn Treaty") are LTC insurance companies based in Pennsylvania. In 2009 they became insolvent. The Pennsylvania insurance commissioner filed in state court a petition to liquidate the company. Penn Treaty's parent company opposed the petition. In May 2012, after lengthy delays and a bench trial, the court denied the liquidation petition and ordered the commissioner to develop a rehabilitation plan. The commissioner recently petitioned to convert the rehabilitation into a liquidation.

On September 23, 2016, the court issued an order approving a settlement involving the commissioner, Penn Treaty, and Penn Treaty's parent company. The settlement provides for Penn Treaty to be placed in liquidation. The court overruled objections of agents who would suffer commission losses, and objections of health insurance companies who would be assessed by state guaranty associations to address part of the shortfall involved in the liquidation. The agents and health insurance companies said they will appeal the ruling.

On November 9, 2016, the court held a hearing on the proposed settlement. It is my understanding that, at the hearing, the court said it would rule on the matter after January 1, 2017. If the court allows the liquidation, the effect would be to trigger coverage by state guaranty associations, who would then impose assessments on surviving health insurance companies. The "hole" is huge. Penn Treaty's assets are about $700 million, its liabilities are estimated to be up to about $4 billion, and its policyholders are likely to suffer significant losses even after the involvement of state guaranty associations.

Northwestern Mutual's Premium Increase Requests
Northwestern Long Term Care Insurance Company, a wholly owned subsidiary of Northwestern Mutual Life Insurance Company, recently announced it was seeking regulatory approval of LTC insurance premium increases for the first time in its history. I requested a statement from the company. A spokeswoman said:
Our filings contain proposed rate increases for several of our inforce LTC insurance blocks of business. These guaranteed renewable products include lifetime pay and limited pay premiums with benefit period offerings of three years, six years, and lifetime.
This is the first time we have raised rates on inforce policies and we don't make this decision lightly. However, we believe that in the best interest of all of our policyowners, this action is prudent to sustain the financial well-being of the product line, and to strengthen our ability to pay future claims.
The requested rate increase, on average, for these policy forms is 27 percent of premium. It ranges from 10 percent to 30 percent depending on the policy features. The amounts and timing of actual increases will vary by state, as they are subject to state insurance department approval. While we expect some states to approve our proposed increase, other states may approve a lower amount. Some may approve in stages, and still others may insist on a higher rate increase. The requested rate increase is due to people living longer, holding on to their policies longer, going on claim more frequently, and staying on claim longer than originally assumed.
I was surprised by Northwestern's action. I thought the company, unlike other companies, used extremely conservative assumptions in pricing its LTC insurance, and therefore charged premiums much higher than those of other companies. Thus I thought the company's LTC insurance premiums would not have to be increased. The company's need to increase premiums supports my view that the problem of financing LTC cannot be solved through private insurance.

The FIO Report
In November 2016 the Federal Insurance Office (FIO) of the U.S. Department of the Treasury issued a Report on Protection of Insurance Consumers and Access to Insurance. The report includes a section on LTC insurance. That section includes a subsection entitled "Failure in the Long-Term Care Insurance Market," which reads:
The number of insurers offering individual LTC insurance declined from more than 100 in the early 2000s to only 12 as of year-end 2015. From 2013 through 2015, LTC insurance annual new premiums fell from $403 million to $261 million, and new lives covered fell from 171,000 to 104,000. In the employer-sponsored LTC insurance market, the number of participants added to group plans dropped by 65 percent between 2013 and 2014, and by another 55 percent in 2015.
Insurers continuing in the LTC insurance market have tightened underwriting standards and are offering new products with fewer benefits at higher prices. These changes likely dampen demand for LTC insurance. In addition, publicity regarding financial difficulties at several major LTC insurers adds to the constriction of the market.
Another subsection, entitled "The Path Forward," says the "social need for LTC is significant and growing." It mentions "aging of the U.S. population" and "increased longevity." It also says:
Consumers, care providers, social services networks, LTC insurance providers, and others in the private sector, as well as regulators and policymakers, should collaborate to develop innovative approaches to lowering LTC costs and promoting the viability of existing and new payment sources. State policymakers and insurance regulators should address the lack of regulatory uniformity that has exacerbated the inherent challenges of the LTC insurance market. The challenges in providing LTC are of acute national interest, and extend far beyond the insurance sector. For that reason, collaboration between federal and state officials is essential—all must work together and embrace the challenge of financing LTC.
The FIO report does not say what "innovative approaches" might emerge from such "collaboration." Nor does the report mention the closed (by invitation only) three-hour LTC insurance "roundtable" that the FIO convened in Washington, D.C. on August 4, 2016. The roundtable, held in the wake of a substantial increase in LTC insurance premiums for federal employees, was attended by insurance companies, insurance regulators, insurance trade and professional organizations, federal agencies, and nonprofit organizations. Discussions of "collaboration" may have occurred, but I do not know what specific suggestions were made. There has not been and apparently never will be a transcript of what was said at the roundtable.

While working on a blog item about the roundtable, I tried without success to obtain from some of the participants the statements they made there. Some did not respond to my request. Others informed me that, when they were invited to participate, they were asked verbally (not in writing) to refrain from circulating their statements because it was important to encourage candor.

After I posted the blog item about the roundtable, I was flattered to receive an invitation to attend a follow-up session. I declined for two reasons. First, I cannot travel long distances because I no longer fly. Second, as a matter of principle, I will not attend a closed session or agree not to circulate any statement that I or others might make. In other words, I will not tolerate censorship.

John Hancock
John Hancock Life & Health Insurance Company is a wholly owned subsidiary of Canada-based Manulife Financial Corporation. On November 10, 2016, Manulife announced financial results for the third quarter of 2016. Here are two separate paragraphs from Manulife's press release:
We completed our annual review of actuarial methods and assumptions in the third quarter, resulting in a net reserve strengthening of $455 million. This amount included updates to policyholder assumptions across a number of products, including LTC insurance in the U.S., as well as a charge of $313 million related to a proactive 10 basis point downward revision to our ultimate reinvestment rate assumptions.....
In response to industry trends and stagnant consumer demand, we are also announcing that we will discontinue new sales of our stand-alone individual LTC insurance product. This decision will not have a material impact on our on-going earnings (see "Caution regarding forward-looking statements"). We are committed to serving our existing customers and honoring our obligations to our over 1.2 million LTC insurance policyholders. We intend to continue to offer LTC insurance coverage as an accelerated benefit rider to our wide range of life insurance products, as this has become an increasingly popular alternative to stand-alone LTC insurance policies in recent years.
John Hancock is the underwriter of the LTC insurance program for federal employees, and was the only bidder when the program was renewed in 2016 for seven years. Now that the company is ending the sale of stand-alone LTC insurance policies, it is not clear what will happen to the program in 2023 if John Hancock does not submit a bid and if there are no other bidders.

Although combining LTC insurance and life insurance into the same package may be "popular," I think it is a frightening idea. Life insurance has proven to be a durable financial instrument in developed countries for centuries. In the U.S., for example, life insurance dates to the first half of the 19th century. However, I have said—and experience has shown—that the problem of financing LTC cannot be solved through private insurance.

I believe that the inevitable result of combining unworkable LTC insurance with tried and proven life insurance will be the destruction of life insurance. "Hybrid" policies containing LTC insurance provisions inevitably will require premium increases, benefit reductions, or both. The reputation of life insurance for reliability will be shattered, with disastrous consequences for the industry.

The Congressional Hearing
On November 30, 2016, the Subcommittee on Government Operations of the Committee on Oversight and Government Reform of the U.S. House of Representatives held a 90-minute hearing entitled "Federal Long Term Care Insurance Program: Examining Premium Increases." The hearing was held four months after the sharp premium increases that John Hancock, with the involvement of the U.S. Office of Personnel Management (OPM), imposed on participants in the federal LTC insurance program. Included among the participants are some members of Congress.

I reviewed the prepared statements of the five witnesses and watched the video of the hearing. The witnesses were a representative of John Hancock, the underwriter of the LTC insurance program for federal employees; OPM, which was charged by Congress with administering the federal statute that created the LTC insurance program for federal employees; the American Academy of Actuaries, on behalf of actuaries who were accused of making faulty assumptions in pricing LTC insurance; and the National Active and Retired Federal Employees Association, which was outraged by the recent premium increases. The other witness was a gerontology professor who is also a consultant to LTC insurance companies.

The chairman and ranking member of the subcommittee made opening statements, and each witness gave a five-minute summary of his or her prepared testimony. Then subcommittee members directed questions at the witnesses for the remainder of the hearing. There was harsh criticism leveled at the OPM representative for not coming to the hearing with recommendations on how to prevent the problem from happening again; however, it is unclear whether that is OPM's responsibility. There was strong criticism directed at actuaries; however, I question whether they should shoulder the primary responsibility for the problems in LTC insurance. Marketing executives and other senior executives who outrank the actuaries surely bear some responsibility for LTC insurance problems.

This sentence in the testimony of the gerontology professor relating to "Long-Term Services and Supports" (LTSS) caught my eye: "Despite private sector challenges insuring this risk, LTSS has all the characteristics of an insurable risk." I disagree. As I have indicated, I believe that the LTC exposure violates important insurance principles, and that the problem of financing LTC cannot be solved through private insurance.

There were suggestions about the concept of private insurance companies providing basic coverage and the federal government serving as a backstop to provide broader coverage. Flood insurance was mentioned as an analogy, although there are major differences between flood exposure and LTC exposure. There were also references to tying LTC insurance to life insurance through hybrid policies.

General Observations
I have said the problem of financing LTC cannot be solved through private insurance. That observation leaves open the question of how the problem should be solved. In my opinion, the only way to address the problem is through the inclusion of LTC benefits as part of a mandatory U.S. government system of national (universal) health insurance (NHI). NHI has been a controversial political issue in the U.S. since 1916. Interestingly, an early supporter was the American Medical Association, which later became a strong opponent. Also interestingly, an early opponent was organized labor, which later became a strong supporter.

NHI is not part of Social Security because President Franklin Roosevelt considered it so controversial that it might jeopardize enactment of Social Security. President Harry Truman advocated NHI but did not have adequate political support for it. Medicare, which I consider a political miracle, was enacted during the tenure of President Lyndon Johnson. The Affordable Care Act passed during the tenure of President Obama is a compromise measure lacking important characteristics of NHI. Today the U.S. remains the only developed nation in the world without NHI. Opponents label NHI (or "Medicare for all") as socialistic, which it is; however, it is also the only way to get everyone insured.

Available Material
I am offering a complimentary 25-page PDF containing these items: the agenda for the FIO "roundtable" and the names of those invited to attend (8 pages); the section of the FIO report relating to LTC insurance (8 pages), and the articles in the February 1988, August 1991, and July 2008 issues of The Insurance Forum (9 pages). Email and ask for the December 2016 package relating to LTC insurance.