How to Effectively Manage a Closed Block of Long-Term Care Insurance
By Bill Naylon
Long-Term Care News, April 2021
Long-term care (LTC) insurance, once eyed by insurers as a growth engine, may now often be viewed as a challenge to their financial health. While there remains an undeniable social need for long-term care financing, LTC product sales in 2019 were only a fraction of what they were a decade ago.
The reasons for the downfall of the LTC marketplace are well chronicled. Industry insiders regularly discuss and debate the reasons behind the collapse, but all generally agree that pricing assumptions missed the mark in a big way. Contrary to original premium pricing assumptions, persistency is higher, interest rates are lower, and the incidence and duration of morbidity is higher than what was expected. Of concern is that the claims experience for in-force policies is still in its infancy, and claims experience in many cases may not yet be credible. According to industry statistics, the majority of claims expected for existing in-force LTC policies have yet to be incurred.
The question now is what to do about it. The purpose of this article is to provide practical ways to mitigate or eliminate the risks that an LTC block may present to an insurer. The following discussion summarizes the key lessons learned by our management team as part of placing a block of LTC insurance into run-off and effectively managing it for the last five years.
Deciding to Continue or Stop Selling
A natural and responsible way to address a line of business that is suffering financially is to stop selling the product. It is possible to price an LTC product to address its inherent and uncertain risks, but the resulting high premiums may make it difficult (if not impossible) to achieve a salable price point. It is also possible to offer the benefit as part of another existing product offering, such as life or annuity products. The ultimate decision will be based on an insurer’s risk tolerance and business objectives.
Ceasing sale is a prudent step taken by many insurers, but it is only a first step. Managing a now “closed” block of business has its own unique challenges.
Once LTC blocks are “closed” or in “run-off,” many insurers choose to place them in an existing service area that supports other insurance products. Some also opt to outsource administration of the block to a third party. In either case, there is often no specific strategy or objective for the closed LTC block, other than to collect premiums and pay claims.
It is critically important that a closed LTC block not be “forgotten” or “hidden” within an enterprise. Ignoring the problem will not make it go away. Instead, the block should be provided with dedicated resources, and management should be charged with developing and executing a strategic operating plan that is approved by governance and aimed at containing the underlying risk. Financial results specific to the LTC business should be budgeted and reported, especially if the business is not already contained in a separate company. Taking one’s eye off the business can have devastating consequences, which may include unplanned reserve strengthening and capital calls, excessive costs, complaints and regulatory compliance challenges. Only with complete transparency on business performance can corrective action be taken that is relevant and effective at addressing the root causes of challenges.
A commitment on behalf of governance and senior officers to effectively manage a closed LTC block should include five key areas of focus to mitigate the risks the block presents to the organization.
Focus Area 1: Take Care of Insureds
It is important to be responsive and consistent in regard to the treatment of insureds. A long-term care event is arguably the worst experience a family can go through. Not only is being helpful to insureds the right thing to do, but it has a positive impact on business results and is viewed favorably by regulators whose primary responsibility is to represent their constituents. From a purely business perspective, taking care of insureds will minimize complaints and litigation costs. A single mishandled benefit determination or claim can cost much more than the potential savings from efforts to control costs. In addition, earning the trust of insureds and their families encourages benefit delivery options that are often better for the insured and less costly to the insurer.
A developing initiative in the industry is to be proactive in managing the health of the insured population. This can often be to the benefit of the insured as well as the insurer. A variety of locally based social service programs are likely already available to insureds, and some vendors specialize in implementing and measuring the success of insured population health management.
Focus Area #2: Simplify the Process and Manage Expenses
Much of the operational flexibility that was valuable when products were actively for sale is no longer needed and adds additional costs for a closed LTC block. Billing individual insureds using an automated process is often easier, faster, and cheaper than group billings and their related reconciliations. Switching all insureds to direct billing is an option. Premium payment methods may also be limited to the easiest and most affordable, such as monthly bank drafts. There is no obligation for an insurer to accept credit card payments, which are both costly and risky to the insurer; banks often charge high fees for every transaction, and the privacy requirements can be daunting.
Focusing resources on insureds may sometimes come at the expense of agent service levels. It is important to remember that the insurer is responsible for meeting claim obligations first and foremost. To do this, it is wise to question all expenses that do not contribute toward that objective. Compliance with distributor contracts must be maintained, but many of the bells and whistles that may have been offered to agents when the company was actively selling are no longer required. The payment of commissions can be simplified and automated by limiting the payment frequency and method. Providing commission statements online can help agents answer questions on their own and control costs. If there is no contractual obligation to allow assignments of commissions, then this practice may be stopped to free up resources for other initiatives. Also, current agent contract provisions may simply need to be enforced; such provisions include the insurer’s ability to change commission levels, commission vesting provisions, and the termination of commissions if they do not exceed a specific dollar threshold. Commission buyouts at a reasonable cost also present an opportunity to eliminate agent service demands entirely.
Whereas policies continue to provide value, agents may not. This can make the continuation of commission payments inconsistent with the underlying objectives for managing a closed block. However, it is important to consider the overall company strategy for all product lines and the importance of keeping good relationships with distributors before taking any of these actions with agents. For example, multi-line insurers may not want to disrupt a healthy and profitable distribution channel to save what could be a small commission expense for the long-term care business.
Focus Area #3: Implement Rate Actions
Filing and implementing actuarially justified rate actions on in-force policies is one action an insurer can take to improve financial health. Every marginal net premium dollar collected or benefit obligation reduced in connection with a rate action will drop directly to the insurer’s bottom line over the life of the policies. The present value versus the cost of this effort is significant. If internal actuarial resources are not available or lack the expertise required, several highly respected firms have actuaries who specialize in LTC rate increases and have developed effective relationships with regulators that can facilitate getting timely and meaningful rate increases. Focusing on rate actions is a frequent choice and the topic of many other articles circulating in the industry today.
In terms of implementing rate increases, being flexible and offering options to insureds can be effective, especially when the options can be discussed with a live insurer representative over the phone. Each insured has unique circumstances that drive their behavior and decisions; as such, it is advantageous to offer a variety of solutions. These options include such things as benefit downgrades already available in the product, offering contingent nonforfeiture benefits (typically at no cost and even if not available in the policy), and potentially even cash buyouts.
Focus Area #4: Build Relationships with Regulators
Regulators control virtually all aspects of an insurer’s business. Thus, insurers need to work closely with regulators and get their buy-in as to how they intend to manage closed LTC blocks. This often may include discussing strategies for operations, rate increases, reinsurance, tax, capital support and investments. The last thing insurers or regulators desire is to be faced with a solvency event. “Visit early and often” was the mantra of one of our regulators.
A deep dive of all insurer contracts can also be a fruitful exercise. This includes a review of all contracts that exist for insurance, reinsurance, groups, agents, marketing, trusts and so on. Often these contracts include provisions of which current management is unaware and that can provide additional de-risking options. For example, a reinsurance agreement may provide the ability to commute, or a group contract may have provisions that allow for termination or premium adjustments. A detailed contract review can be well worth the effort and may require regulator oversight to implement potential de-risking opportunities.
Focus Area #5: Work Toward Reserve Adequacy
The adequacy of reported reserves is inherently subjective and subject to constant reevaluation. That said, management should be able to target a reserve range in which they can have confidence that policyholder obligations will be satisfied. A closed LTC block likely has a long life remaining, which can provide a long time to address challenges. If the ability to strengthen and fund higher reserves is not immediately available, the insurer can create a plan to achieve the target reserve range over time. A close working relationship with regulators can be helpful in designing such a plan.
It is important not to forget the original reasons for exiting the LTC marketplace, which may include uncertainty of underlying risks, financial losses or reserve adequacy. When and if the business begins to report sustainable statutory profits, consideration should be given to using those profits to strengthen reserves until such time as there is a high probability of satisfying policyholder obligations under a worst-case scenario. After all, it is unlikely the business was placed in run-off with the objective of generating profits. Building adequate reserves and protecting the organization from the risks presented by the LTC block can be a primary objective.
In conclusion, an LTC block can rank high on the list of risks an insurance organization faces. This is exactly why it is important to actively manage the closed block in an effective and efficient way, with the full support and engagement of the organization’s C-suite.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.
Bill Naylon, CPA, MBA, CIA, is President of MedAmerica Inc. He can be reached at Bill.Naylon@medamericaltc.com.