An Industry In Retreat
As reported in Health Life Pro, Prudential Group Insurance, a division of Prudential Financial Inc., which manufactures and distributes group life, long-term and short-term disability as well as corporate, trust-owned life insurance, accidental death and dismemberment and other coverage and plan administrative services, announced on October 9, 2012, that it is discontinuing the sale of dental insurance, offered primarily to the small-group market.
Prudential’s decision to drop these lines of business is consistent with a general trend among many large carriers to drop supplementary lines of business and concentrate on their core strengths, in order to focus resources on more profitable product lines.
Hartford recently sold their individual life unit to Prudential, including universal life, variable universal life, indexed universal life, term life and whole life insurance products, which they had offered through a variety of distribution channels in the U.S. As a result of the sale, Prudential will reinsure about 700,000 life policies that provide about $135 billion in coverage, giving them control over the $7 billion in assets and reserves backing the policies, and allowing them to take over management of $5 billion in separate account assets.
As I reported here, the Hartford was pressured by their largest shareholder to sell off supplementary businesses and focus on their core product suite.According to John Nadel, analyst at Sterne Agee, the sale of its individual life business frees up roughly $1.5 billion of statutory capital, “well more than the estimated $1 billion investors were expecting.” This transaction is the last of three planned business sales intended to allow the Hartford Group to focus on its strategically important businesses, in which it has greater scale and competitive advantages.
Concerns Over Long Term Care Insurance
Prudential’s decision to drop this line of business follows their decision in July to discontinue sales of new group long-term care insurance, due to complications with this type of product. The decision is said to be a tactical one which Prudential hopes can help them focus on their life and disability products, where it sees the greatest opportunity for long-term growth. Prudential discontinued sales of LTC group coverage in all states except Indiana, Iowa, Kansas, Louisiana and South Dakota, where the company is required by law to continue to offer products for a period of time. The decision is based on the continuing effects of low-interest rates and Prudential’s desire to achieve appropriate returns, enhance its long-term risk profile and maintain sustainable profitable growth, in its core group life and disability lines of business, according to the company.
A Troublesome Industry Trend
In recent years, a number of companies have expressed concern over the complicated nature of long-term care insurance. MetLife, Allianz, Aetna, UNUM and Guardian have all exited the business, largely because they say it is difficult to anticipate payouts due to the a rapid increase in healthcare costs. Genworth remains the last remaining major insurer in the Group LTC business.
With other leading insurance carriers leaving the group LTC market, there has been speculation about whether this product line can continue. Considering that Long Term Care costs are not covered under Medicare, and that the costs of Long Term Care can be devastating to seniors and their family members, this trend can be seen as troublesome.
Should we be concerned about the exodus of leading insurers from Group LTC?
Why LTC Matters
What Is Long Term Care Insurance (LTCI)?
Long Term Care expenses are the non medical costs of caring for a person who cannot take care of him/herself due to a chronic medical condition. Long term care services are not typically covered by health insurance or Medicare and can include:
- In-home care
- Nursing home or skilled nursing facility care
- Assisted living facility care
- Adult day-care
- Alzheimer’s unit care
- Hospice care
Since these costs are very expensive, and not covered by Medicare, uncovered LTC expenses can quickly devour a family’s financial assets:
- In 2008, the average cost to stay in a semi-private room in a nursing home for one year was $68,000.*
- The average cost of one year of in-home care was $18,000, assuming care was given by a home health aide about three times a week.*
- Long term care costs increase about 4 percent per year.**
See Long Term Care costs in your state.
Government benefits are only offered when a family has spent itself into poverty and qualifies for Medicaid. While people may try to transfer assets out of their name to qualify for Medicaid, the states can’t afford this anymore, and has been tightening the loopholes so that only the truly indigent will qualify for government support. Yet, according to the Department of Health and Human Services:
- 70% of Americans over 65 will need some long-term care at some point in their lives.
- Only about 3% of adults have a private LTC policy.
Long Term Care Insurance (LTCI) safeguards a person’s financial benefits.
Is LTC Dead?
As Frank Zappa said about Jazz: “It isn’t dead; it just smells funny.”
According to Richard W. Samson of Employee Benefit Adviser, the exodus from Group LTC does not mean the death of the long-term care industry. He believes that the LTC industry will not only survive, but “may be preparing for vigorous new growth.”
Rather, it appears to be a fight for dominance between “multi-life” and “true group” plans.
And, in addition to multi-life, there are also LTC combinations, such as LTC riders on life insurance or annuities, that are being marketed by a number of insurers.
True Group vs. Multi-Life
True group benefit programs are typically used by larger companies, while multi-life programs are marketed to organizations of all sizes. The differences:
- True group long-term care insurance issues a master policy to the employer or sponsor, has a group premium structure, and is typically guaranteed issue.
- Multi-life LTC insurance issues no master policy, but individual policies to each insured member, and has generally greater policy design flexibility. However, in comparison with ordinary individual policies, it provides discounted standard rates and simplified underwriting for active employees.
While Genworth Financial is the last major insurer that continues to promote its true group as well as individual and multi-life plans, several carriers promote multi-life plans, including LTC. They include:
- MedAmerica Insurance Company
- LifeSecure Insurance Company
- United of Omaha Life Insurance Company
- Mutual of Omaha Insurance Company
- Transamerica Life Insurance Company (U.S.A.) and Transamerica Financial Life Insurance Company (NY)
- American General
Samson interviewed representatives of these companies, including Bill Jones, president of MedAmerica, who agrees that the industry is making a fundamental shift from group to multi-life. He states:
The traditional group plan is being outpaced by multi-life LTC insurance, which is more flexible and fine-tuned for modern organizations.
Med-America has introduced the LTC Complete Worksite Solutions product portfolio, which allows employees to enroll in a low-cost starter plan that may be expanded later.
LifeSecure, after their second year in multi-life LTC, reports that it now accounts for 75% of their placed premium.
A Transition Toward Voluntary Benefits
Samson reports that Eric Cantrell, president & CEO of Collateral Benefits Group, predicts that in the next 10 to 20 years, workplace benefits will largely be voluntary, and multi-life LTC insurance is well suited to a menu voluntary benefits.
Cost Sharing: This is consistent with the current trend in employee benefits, in which the burden of coverage is increasingly shifting from the employer to the employee.
Personalization: Additionally, with the commoditization of healthcare benefits, and increased focus on the individual’s needs, the “one-size-fits-all” or “cookie-cutter” traditional group plans simply don’t give employees enough choice among benefit features and premium costs. Multi-life has the advantages of greater flexibility and personalization, largely due to emerging technology. Benefit brokers and LTC insurance specialists, using electronic systems, can give employees individual attention and greater personalization without taxing the resources of the company.
Higher participation: As a result, while fewer than 10% of eligible employees typically choose to participate in traditional plans, multi-life programs tend to generate much higher, double digit participation rates – between 10% and 20%.
Larger market: True group plans tend to be limited to larger organizations, which tend to prefer to work directly with an insurance carriers. However, the Bureau of Labor Statistics reports that 54% of American workers (59 million) work for companies with fewer than 500 employees. Considering the larger market, and the higher potential participation rates, the market potential for multi-life LTC could grow to represent 70% to 80% or more of the total market.
Conclusions
A challenge for LTC insurance today is that most don’t yet recognize the risk. But as the American workforce ages, and we live and work longer and longer, the growing need for LTC protection will be increasingly understood, boosting the value of LTC benefits for recruiting and retention.
The market potential is enormous. The American Association for Long Term Care Insurance reports that total earned premium for the LTC industry in 2010 was about $11.7 billion. Based on the estimate of 10% market penetration, LTCI represents potential revenues of over a trillion dollars, $3 trillion over 30 years.
Despite the need and the market potential, awareness remains the major roadblock. Complex Long Term Care products have been a hard sell.
The one-to-one personalization that benefit brokers bring to multi-life worksite products could help overcome that barrier.
**U.S. Bureau of Labor Statistics, Consumer Price Index Detailed Report, September 2009.
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