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

Annual health care spending increases with age

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.


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.

*, October 2008.
**U.S. Bureau of Labor Statistics, Consumer Price Index Detailed Report, September 2009.

Click here for related posts on Hartford.



BAC Price / Book Value Chart

Too Big to Trust?

Dana Blankenhorn of offered some interesting observations made on why reinstating the Glass-Steagall Act Act would be good for investors.

Since Gramm-Leach-Bliley repealed the act in 1999, allowing banks, security companies and insurers to merge, we have seen the unparalleled economic dominance of a few money center banks, primarily JP Morgan Chase (JPM), Bank of America (BAC), Citicorp (C) and Goldman Sachs (GS), which was forced to become a bank holding company in the 2008 economic collapse.

Although the banks and the regulators appear to see massive size as a virtue, Moody’s continues to downgrade the paper of Bank of America and Citicorp, the two weakest of these banks, while fears loom of another wave of job cuts.

The problem, according to Seeking Alpha, is that no one knows what these banks are really worth:

How many bad mortgages do the deposit-taking banks still hold? What kinds of derivative contracts do the investment banks still carry? Can this mess really be untangled?

This is why investors have been fleeing these banks. The chart above confirms that none of these banks are currently trading close to their book value. Citigroup and Bank of America, which haven’t traded at book value since the economic collapse, are now trading at 60% discounts. Dana Blankenhorn puts it this way:

Too big to fail has become, in the minds of investors, too big to trust. And too big to succeed. Imagine the value that could be unlocked if these banks were now broken up. It’s certainly possible that more financial sludge could be uncovered in that process. But the fear of that sludge has now become more powerful than the sludge itself, and knowing would provide a financial benefit.

It Doesn’t Take an Act of Congress – Just Brains and Guts

You’re probably saying that it seems unlikely that Washington would have the political will to do what’s right, and just reinstate Glass-Steagall.

So Blankenhorn’s suggestion is for the banks’ board of directors to show some guts and brains, and act in the best interests of investors. They need to understand that the best way to realize the full value of the bank’s assets would be to separate what is backed by deposits from what is backed by the institution itself – in other words, re-erect the Chinese Walls that Glass-Steagall had put up between investment banking and consumer banking. Remember that Glass-Steagall’s Chinese Wall is what prevented thes meltdowns since the Great Depression, and that dismantling it resulted rather reliably in the subprime mortgage crisis and brought on the Great Recession. Breaking up the big banks in this way would benefit the investor in two ways:

  1. It would unlock value.
  2. It would increase trust in the banks, on the part of investors and depositors.

“And without trust a bank is worthless. Or, at least, worth less than it is worth.”

Addressing the cynics who believe that break ups would result in economic confusion, Blankenhorn points out that the big banks are already slowly withering away. Smaller banks are already growing stronger, and smaller brokerages stealing the industry’s best talents.

Debunking the Myth

We’ve heard it before:

  • “Health insurers are gouging the consumer.”
  • “Free market principles will reduce healthcare prices if people have to pay for it out of their own pocket.”
  • The Affordable Care Act is a Machiavellian scheme by insurance companies to make a windfall profit.

Americans spend more per capita and the highest percentage of GDP on healthcare than any other OECD country. Why are healthcare costs rising at a rate that is higher than anywhere in the world? Are the insurance companies price gouging?

A Brief Primer on Risk management and Health Insurance

Insurance is a form of risk management used to hedge against the risk of a contingent, uncertain loss through the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment.

The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of a premium payment to the insurer in exchange for the insurer’s promise to compensate the insured in the case of a personal financial  loss. In health insurance, morbidity risk and historical costs are averaged and apportioned among subscribers. Subscribers pay a premium each month even when they don’t avail themselves of the services, because when they finally do need medical services, the costs can be financially devastating.

Why are Health Care Premiums Rising?

Health insurance premiums have nearly doubled since 2000, growing 3 times faster than wages. Are insurers are gauging consumers? Insurance profits account for just 3% of health care costs, while providers and suppliers are responsible for 76%.

Insurance companies provide shared risk services by  apportioning the costs of health care services among the subscriber pool.  They are responding to increasing  costs, not setting them.  Forced to respond to rising costs in the health care market, they find themselves at the forefront of the battle, implementing strategies to reduce costs and keep the premiums affordable. Strategies include negotiating better rates with providers, working to provide better outcomes, audits of physician group standards and practices, and piloting alternatives to fee-for-service payment.  However, it seems that, as fast as the insurers get a handle on costs, providers respond by raising their own costs to pass the upstream costs to the consumer and it’s representative, the insurers.

Myth: Making Americans Pay More Will Bring Down Health Care Costs

A recent market response to increasing health care provider costs is that employers are increasingly purchasing plans that allow for greater employer-employee cost sharing, purchasing plans under which the employees’ share of the costs higher. They are also opting for more affordable plans with increased out-of-pocket deductibles and coinsurance payable by insureds.

A shrinking market doesn’t make insurance companies more profitable, but places greater pressures on them to stay afloat and remain profitable, and one problem is that increasing premiums and decreasing benefit payments pressure healthier individuals to opt out of the premium pool, causing adverse selection risk which raises premiums for everyone.

And the statistics show that, although increasing numbers of American families are responsible for a greater share of their health care costs, provider costs still just continue to increase.

Given the rising costs of health care services, with each passing year, families face increasing deductibles, copayments, and other out-of-pocket expenses, requiring them to make difficult decisions to make ends meet. Today, middle class American families with high out-of-pocket expenses spend 21 percent of their income on health care services – not including premiums.

One recent survey estimated that 72 million, or 41 percent of nonelderly adults have accumulated medical debt or had difficulty paying medical bills in the past year, even though a 61 percent majority had health insurance. These high-cost households pay an average of 18 percent of their household income on health care expenses, not including premiums, vs. an average of 1 percent for the other households. High-cost households shoulder 43 percent their total health care expenditure burden on their own, compared to an average of 17 percent for other households.

Those who experience the highest levels of out-of-pocket costs are more likely to be women and the older. They are also significantly more likely to suffer from common diseases such as diabetes, heart disease, and cancer – they are three times as likely to have cancer, diabetes, or heart disease, and twice as likely to have high blood pressure as people in lower-cost households. 71 percent of individuals in high-cost households had one or more chronic conditions compared to 44 percent of individuals in lower-cost households. 33 percent in high-cost households have three or more chronic conditions, compared to 10 percent in lower-cost households.

Upstream Costs Continue to Rise

An article at the Huffington Post titled Typical Hospital Wastes Up To $3.8 Million A Year On Readmissions: Study identifies some of the cost issues perpetrated by provider groups.

A typical hospital with 200 to 300 beds wastes up to $3.8 million a year, or 9.6 percent of its total budget, on readmissions of patients who shouldn’t have had to come back, says Premier, a health care company that advises hospitals on improving efficiency and safety. The company analyzed the records of 5.8 million incidents in which a patient went back to a hospital to be re-treated and found they added $8.7 billion a year, or 15.7 percent, to the cost of caring for those people…Hospitals are ground zero for health care cost-containment efforts because they are the biggest recipients of America’s health care spending, having taken in $814 billion in 2010, according to a federal government report.

According to the article, wasteful spending in the U.S. health care system has been estimated to be as high as $850 billion each year, according to a 2009 Thomson Reuters report. Overall health care spending rose by a factor of 10 between 1980 and 2010, when it reached $2.6 trillion.

The health care reform law enacted two years ago expands on efforts begun three years ago to link how much Medicare pays hospitals to how well they reduce medical errors, readmissions, and other inefficiencies. Starting next year, hospitals will see their Medicare payments docked by 1 percent if they don’t cut back on these readmissions. The penalty increases to 3 percent in 2015.

Premier’s message to hospitals feeling squeezed: The money you need to save is already in the system. The company has identified 15 steps hospitals can take to improve the care they provide while also saving money, such as making sure patients are treated right the first time and don’t need to be “readmitted” for more care. By analyzing information culled from its hospital partners, Premier recommends other targets for savings, such as performing fewer blood transfusions and limiting costly tests.

A  report by Robert Kelley, vice president of healthcare analytics at Thomson Reuters, found.shows that the U.S. healthcare system wastes between $505 billion and $850 billion every year.

“America’s healthcare system is indeed hemorrhaging billions of dollars, and the opportunities to slow the fiscal bleeding are substantial,” the report reads. “The bad news is that an estimated $700 billion is wasted annually. That’s one-third of the nation’s healthcare bill,” Kelley said in a statement. “The good news is that by attacking waste we can reduce healthcare costs without adversely affecting the quality of care or access to care.”One example — a paper-based system that discourages sharing of medical records accounts for 6 percent of annual overspending. “It is waste when caregivers duplicate tests because results recorded in a patient’s record with one provider are not available to another or when medical staff provides inappropriate treatment because relevant history of previous treatment cannot be accessed…The average U.S. hospital spends one-quarter of its budget on billing and administration, nearly twice the average in Canada,” reads the report, citing dozens of other research papers.

Some other findings in the report from Thomson Reuters (the parent company of Reuters):

  • Unnecessary care such as the overuse of antibiotics and lab tests to protect against malpractice exposure makes up 37 percent of healthcare waste or $200 to $300 billion a year.
  • Fraud makes up 22 percent of healthcare waste, or up to $200 billion a year in fraudulentMedicare claims, kickbacks for referrals for unnecessary services and other scams.
  • Administrative inefficiency and redundant paperwork account for 18 percent of healthcare waste.
  • Medical mistakes account for $50 billion to $100 billion in unnecessary spending each year, or 11 percent of the total.
  • Preventable conditions such as uncontrolled diabetes cost $30 billion to $50 billion a year.
  • American physicians spend nearly eight hours per week on paperwork and employ 1.66 clerical workers per doctor, far more than in Canada,” (quoting a 2003 New England Journal of Medicine paper by Harvard University researcher Dr. Steffie Woolhandler.)

All this could help explain why Americans spend more per capita and the highest percentage of GDP on healthcare than any other OECD country, yet has an unhealthier population with more diabetes, obesity and heart disease and higher rates of neonatal deaths than other developed nations.

Blaming the Victim?

The solutions that we see publicized in the national health care debate ignore the upstream forces that push costs up. Insurance companies aren’t the problem. They’re the ones who make care procedures affordable, using sound principles of risk management. They are heavily regulated both at the federal and state levels, and are doing what they can to attempt to keep the health costs from rolling higher.  The threat isn’t the insurers but the lack of accountability at the provider level.

For example,the Affordable Care Act requires new medical loss ratio regulations make insurance marketplace more transparent and requiring insurers to spend premium dollars on care. These new regulations issued by the Department of Health and Human Services (HHS) require health insurers to spend 80 to 85 percent of consumers’ premiums on direct care for patients and efforts to improve care quality.  If they don’t, the insurance companies will be required to provide a rebate to their customers starting in 2012.

“Thanks to the Affordable Care Act, millions of Americans will get better value for their health insurance premium dollar,” said HHS Secretary Kathleen Sebelius.  “These new rules are an important step to hold insurance companies accountable and increase value for consumers.”

Yet, with all the regulation directed at insurers, and government providing insurance-based healthcare solutions like Medicare and Medicaid, it seems that little attention is being paid to the upstream providers who set the costs.

While  some argue that the market should prevail and providers should continue to set their pricing at whatever levels they see fit, some providers provide a sliding scale based on need, which is a recognition of the problem closer to its causes. Somehow government solutions don’t address the causes and simply aim to regulate the consumer and his/her representative – the insurer, kicking the can and passing the buck without reforming the problem area.

In this blog, I will continue to explore the healthcare system, highlighting the innovative solutions that the health insurance industry continues to implement to contain costs, while also examining the upstream sources of the problem.

Snap principle of the rising consumer health care costs:

Insurers are at the forefront of containing consumer costs, but the upstream providers need sweeping reforms. 

The Dilemma of Employer Sponsored Healthcare

As a follow up to my discussion of the Supreme Court’s deliberation on Affordable Health Care Act here, I would like to point to an article by Wendell Potter, who has held a variety of positions at Humana Inc. and CIGNA Corporation, including CIGNA’s head of corporate communications and chief corporate spokesperson.  Mr. Potter points out that:

If there is a group of people more anxious about how the Supreme Court will rule on the health care reform law than President Obama and the millions of Americans who are already benefiting from it, it is health [insurers.]

This provides an invaluable opportunity to reflect on the principles of insurance and how insurance companies can continue to profit and grow in the U.S. One of the dilemmas health insurers face is that some of the primary principles by which businesses become more profitable are not available to them – expansion of services and control of costs.  They have been unable to appreciably bring down the skyrocketing costs of U.S. healthcare and expand coverage. The current model, which excludes certain consumers from coverage only shifts more of the cost of care  to policyholders, increasing the cost burden on both businesses and consumers while reducing the incentive for businesses to purchase employer-sponsored healthcare. And the costs to individuals and small businesses are prohibitive.

Why The Industry Needs The Mandate

Large insurers like Cigna and Aetna grew in the 1990s and 2000s by acquiring smaller competitors. Because of the rising costs and danger of adverse selection in a shrinking pool of consumers, an acquisition strategy is not sufficient to provide increasing quarterly profits to shareholders.  Consequently health insurers are now diversifying by buying data and care management businesses as well as hospitals and physician groups.  The fact is that, without government support, the health insurance business cannot rely solely on free market dynamics to fix the very inefficient U.S. healthcare delivery system.

This is why the industry initially supported President Clinton’s healthcare reform program in the 1990s. Karen Igagni, head of the industry’s largest PR and lobbying group, Health Insurance Plans, testified to a Congressional panel in 1993:

The need for national health care reform has been well documented… Universal coverage at broadly affordable cost becomes possible only when insurance risks are spread across a large community. Currently, most health coverage is priced using “experience rating,” where high premiums are set for high cost groups and low premiums are set for low cost groups. Experience rating financially discriminates against populations that experience high costs: the very young, the very old, the chronically ill, and those with pre-existing conditions, such as diabetes.

Larry English, the former president of Cigna HealthCare, also testified to the committee that he embraced universal coverage and other reforms.  The reforms only lost their support when some of the regulations proposed by the Clintons appeared to have the potential to curtail profits, and the industry endorced “the invisible hand of the market” as the means to bring costs down.

The free-market solution meant that insurers had to keep increasing  premiums and deductibles to keep meeting profit expectations. More restrictive high-deductible plans proved unpopular, an it did not prove a sustainable strategy.

Not a Question of If  – but When and How

Without the individual mandate, the pool of buyers and insurers’ profit margins will continue to shrink. As insureds become increasingly older and morbidity risks increase, premiums will become less affordable. Wendell Potter points out that insurers will have to transform their companies even more rapidly and get out of the risk business sooner rather than later.

The examples of other developed economies illustrate that the basic economics of health care demand government intervention of one kind or another. The questions are simply when and how.

Snap principle of health insurance delivery:

Prepare for sweeping changes

It's so hard to find a good pet insurance salesman.

Strong Growth Pet-ential

The pet insurance market is a rapidly emerging market, with spending estimated at $450m in 2011, according to a recent articlein Stl Today. In fact, a new study by Packaged Facts indicates that sales of pet insurance policies are actually growing faster than the sales of veterinary services. Following a jump of 27 percent from 2007 to 2008, pet insurance sales rose 16 percent from 2008 to 2009, according to Packaged Facts. Sales of veterinary services rose 10 percent during the same year.

Pet insurance revenue in North America totaled $354 million in 2009, up from $310 million in 2008, according to a Packaged Facts estimate.  The growth is not expected to end, estimates Packaged Facts, which says pet insurance sales in the United States could climb toward $760 million by 2014.

According to APPA (American Pet Product Association), the number of US households that own pets has steadily increased to an all-time high of 72.9 million in 2011/2012.  APPA also projects that pet owners are going to spend up to $12.2 billion dollars for veterinary care in 2012.

Pet health insurance has been available in the United States for nearly 30 years, but expanded veterinary treatments and changing attitudes toward the family pet have bolstered the number of policies over the last decade, even during the economic downturn. Three percent of the nation’s 78 million dogs and 1 percent of its 93 million cats are now covered, according to a recent American Pet Products Association estimate. That’s up from 1 percent of dogs and virtually no cats covered in 1998.

What’s the potential for this market? Pet insurance has gained wide acceptance in some European countries, such as the United Kingdom, where 20 percent of pets have policies, and Sweden, where at least 30 percent of pets are covered, according to New York-based research firm Packaged Facts. St. Louis-based Nestlé Purina PetCare, which started its PurinaCare insurance subsidiary in 2008 and has expanded coverage to all 50 states, believes that eventually 10 percent of U.S. pets will be covered by insurance.

Changes in people’s social support systems — higher divorce rates, fewer children and people living farther away from their families — has helped drive this trend, said James Serpell, a veterinary ethics professor at the University of Pennsylvania’s School of Veterinary Medicine. “We’re using animals to replace what we’re losing in human social relationships,” he said.

Who Let the Dogs Out?

In 1982, VPI Pet Insurance issued the first pet insurance policy in the United States. VPI has long dominated the industry, but it has lost market share in recent years as more providers emerged. VPI had 52 percent market share in 2009, according to Packaged Facts, down from 68 percent in 2005. The number of pet insurance providers in the nation doubled over the last decade from six to a dozen in 2010.

Among the newcomers is Nestlé Purina. After studying the pet insurance market for three years, the company felt it could be competitive by drawing on its experience and research in pet health.  According to company executives, a void existed in the market for people to access information about what pet policies covered. Packaged Facts estimates it still has less than 1 percent of the North American pet insurance market. However, the entry into the market of such a large global consumer products conglomerate, no less one as cautious and conservative as Nestlé Purina is a sign of the market’s strong growth potential.

Rivals include pet retailer PetCo and the financial services division of grocery chain Kroger. There’s speculation that Wal-Mart will introduce a pet insurance product at its Canadian stores this year.

“I think that the tipping point will be when big retailers get into it, and we’re right on the verge with retailers exploring it,” said Kristen Lynch, executive director of the nonprofit North American Pet Health Insurance Association, whose members include pet insurance providers.

Still Laughing? You Haven’t Seen the Bill

Veterinary care isn’t cheap. It’s second only to food in the amount people spend on pets. Of the $50 billion expected to be spent this year on pets, $14.11 billion will be for vet bills, up from $13 billion last year.  Visits to the office can start at $100 but can quickly add up to several thousand dollars when multiple procedures are performed.  Treatment for some chronic diseases such as cancer can cost pet owners more than $300 a month. Many pet owners are willing to pay the cost, with or without insurance.

By comparison, monthly pet insurance premiums can be a bargain. They can start at around $10 but can exceed $100 for some older dogs. Plans may allow pet owners to pay lower premiums in exchange for bearing a higher percentage of the bill, between 30 percent and 40 percent of eligible expenses.

Some of the higher-end preventive plans cover heartworm and flea medications in addition to vaccines and annual exams while some lower-cost plans just provide coverage for unexpected accidents and illnesses.  A $1,180 vet bill for a dog’s broken leg under VPI’s Super Plan, for example, will reimburse the pet owner $1,002. With a lower monthly payment, VPI will reimburse $626 of the vet’s bill.

Consumer Reports’ Money Adviser newsletter’s article analyzing VPI, ASPCA Pet Health Insurance, 24PetWatch QuickCare and Trupanion concluded that for generally healthy animals, pet insurance isn’t worth the cost, and establishing an emergency fund for unexpected pet bills is a better choice. Still, the report stated that for young pets that develop a chronic condition or illness after the policy is in place, having the policies paid off.

Time to Let the Cat Out of the Bag

As the market for pet insurance continues to grow, ReviMedia has launched a new website that gives a general overview of pet insurance options and provides users with all the necessary information for choosing the right plan for their pet. was designed to support pet owners in making an informed, independent decision and to have a positive effect on the pet insurance industry’s growth.

ReviMedia, Inc, which has offices in New York City, Panama and Holland, specialized in developing and executing direct response and performance marketing campaigns. It has a industry leading platform and campaigns focusing on high quality lead generation in insurance verticals, exclusive in-house offers and more.

Who do marketers need to target? The Packaged Facts report suggests that the best candidates might be upper income households who already indulge their pets. According to their data on who is buying pet insurance, nearly 7 percent of dogs who are taken to the veterinarian three or more times per year are covered by insurance. So are 5.3 percent of dogs belonging to a household with an income of $60,000 or more. About 5 percent of large-dog owners purchase pet insurance, as well as 4.5 percent of owners who spend $240 or more per year on dog-related expenses.

The Atlantic’s Megan McArdle looks into the real reasons “Why Companies Fail.”  Using GM as a case study, she concludes: “the answer is often culture—the hardest thing of all to change.” I see The Hartford as a case in point.

Business failure is about mismanagement – corporate culture that results in business practices that fail to balance risk with reward and complacency with scale. While short term returns are maximized for the majority shareholders (private equity firms) then there is a strong anti innovation incentive. Rather than innovate, management tinkers to fine tune shareholder equity.

Shareholder-Compliant Culture vs. Sound Business Fundamentals

Private equity firms in the past have targeted 20% returns vs. a public average of 8 – 10%.  That extra margin of 10% return creates pressure on management to focus on rationalizing operations, rather than investing in growth. For The Hartford,  fund manager John Paulson was reportedly pressing for 40 – 60% when he insisted on breaking up The Hartford to maximize the share price.

Management had already been stretching itself thin, making a series of compromising business decisions to satisfy shareholders at the expense of sound business judgement.  Not rocking the shareholder boat had resulted in the abandonment of the fundamentals of running a business,exposing them to increased market risk that came unexpectedly during the market plunge of 2008.

By the fundamentals of running a business, I mean anticipating consumer trends and opportunities, and moving resolutely and soundly to profit from them – encouraging the risks of creativity and innovation, buttressed with proper actuarial assumptions.  But habitual capitulation to shareholder pressure can make it more likely that a company will pursue the production of high profit margin widgets (as with GM’s SUVs), and/or fight to dominate a familiar market niche,  shaving margins without adequate hedging, as Hartford did in its race to add costly, improperly hedged generous living benefits to its Variable Annuity products.

Actuarial and Claims Issues Parallel the ’97 DI Market

Top-down shareholder compliant strategies can result in a slippery slope to a highly leveraged position and extreme sensitivity to market fluctuations, which further erodes profit margins and investment in distribution.  As a result of the losses and potential losses owing to their Variable Annuity living benefit provisions during the 2008 market decline, The Hartford all but discontinued sales of variable annuities, a strategic mistake that resulted in the loss of a distribution system.

Actuarial losses in products that produce periodic claims typically result in companies withdrawing from the market as the result of adverse claims and declining profits. This is what happened with Noncancellable and Guaranteed Renewable Disability Income policies with Own Occupation definitions of disability in the mid 1990s.

The Own Occupation definition of disability was so generous that a surgeon could collect benefits for “gray area claims” –  conditions with self-reported symptoms for which little objective medical data was available to support, including Fibromyalgia, Epstein-Barr Syndrome, Chronic Fatigue Syndrome, Carpal Tunnel Syndrome, and various mental- and nervous disorder-type claims.  As long as they prevented the insured from performing the duties of his own occupation (for example, surgery) but allowed him to keep working (in general practice, for instance)  a specialist could claim full disability benefits equivalent to 70% of average monthly income while continuing to practice medicine. It was a windfall profit for savvy physicians who could effectively double their earnings, but a major loss for Disability Income Insurance (DI) providers. A difficult economy caused by reduced payments under managed care plans helped touch off a spate of claims that DI providers could not sustain.

In response to the financial crisis, many insurance companies exited the disability market, while others consolidated. Three of the nation’s largest – Provident Life and Accident Insurance Company of America, Paul Revere, and Unum Corp—are now one company, UnumProvident, which writes some 40 percent of disability insurance in the country, while a handful of companies now comprise the bulk of the market.

For remaining carriers, benefits were scaled back by tightening eligibility through stricter definitions of disability, and switching to Residual Income policies, which only paid percentage of income lost due to disability.

Synopsis of the Implosion of the DI Market

Here’s an excellent synopsis of the DI market shakeout by Physicians News Digest:

By the mid-1990s, disability insurance companies began to report a large increase in the overall number of disability claims, as well as an increase in the incidence of claims for conditions with self-reported symptoms for which little objective medical data was available to support, according to Tim Mitchell, national sales director for MetLife, which concentrates on group disability writing for large companies. Such “gray area” claims, which Mitchell says continue to escalate, include Fibromyalgia, Epstein-Barr Syndrome, Chronic Fatigue Syndrome, Carpal Tunnel Syndrome, and various mental- and nervous disorder-type claims. Aggravating the trend, Mitchell adds, was an older work force than in the past and the movement of the baby boomer population into the 45 to 55-year-old age bracket, which he says produces the highest incidence of disability claims. Although these claim trends were mirrored by other occupational groups such as attorneys, says Mitchell, insurers’ experience with physician claims was particularly negative during the onset of managed care, says Mitchell. “In the past,” he says, “physicians with disabilities were so dedicated to their occupation and making so much income that they were willing to work through their disability.” Managed care reduced physician income and increased bureaucratic hassle, he adds, leaving disabled physicians less willing to work through a disability. Perry notes that adverse physician claims experience was particularly acute in the California area, where managed care had a head start on the rest of the country. A less charitable assessment, made by some insurance companies and analysts during the crisis of the mid-1990s, was that managed care had eroded healthy physicians’ work ethic and that many found that they could earn a considerable income by cashing in their generously-written disability policies.

Hartford Suffers The Same Fate

The “quantitative myopia” of The Hartford caused them to build in generous product features that would kick in during a bear market. But it seems they failed to factor in the worst case scenario – that a bear market might actually arrive. The tipping point came in the form of the recent mortgage bubble collapse.

The ones who suffered from this were employees who faced layoffs, and today face massive layoffs since the situation has became so untenable that private equity shareholders have demanded units be spun off.  Paulson wants The Hartford to focus on its more profitable core business to increase shareholder returns 40% to 60%.

Problems of this magnitude often never come to light until the last minute because, as long as influential shareholders are getting a reliable return, they are content to allow the business to manage itself, while, within the organization, there is little incentive to rock the boat, fund innovation, and undertake creative risk tempered by sound risk management.

The Mistake That We are Condemned to Repeat

This is, unfortunately, an inherent flaw in our capitalist model, and one that is difficult to resolve from the inside. Outside in oversight can be established in the form of reserve requirements and such, and government has a role to play in this as the canary in the coal mine.  But government’s role is, of course, reactive rather than proactive, focusing on consumer protection and ethical trade, and the financial integrity of the institution.

The large banks are today fast approaching a point of insustainability that may require private equity firms to eventually break them up as well. But we know historically that if we wait that long, it’s already too late to undo tremendous damage to the broader economy.  At that point there are calls for government bail outs, and the endemic issues of corporate governance are left untouched.

Theodore Roosevelt took an activist approach to trust busting, to break up institutions that overreach, and laws like Glass Steagall were effective protections against the self-destructive cannibalistic policies that resulted from the merger of consumer banking with investment banking. Deregulation and failure to rigorously oversee business practices, including most prominently the trading of derivatives, resulted in a major financial setback resulting in a housing crisis, massive unemployment, ballooning public debt and increased income polarization.

Today, lacking real corporate governance, retail institutions like Walmart have forced suppliers to compete for the lowest possible unit costs, resulting in manufacturing being shipped to China and Bangladesh for 40 cents per hour wages, further eroding economic viability and lowering GDP. All we can do is throw up our hands and say that the answer is to just let the “free market” rein, drill for more oil and frack for gas, simplistic answers that ignore root issues.

You would think that business schools would have trained managers and congress to better understand the fundamentals of running a business.  It appears that government works in much the same way that the private sector does, with large shareholders dictating economic policy. Politicians are for the most part myopic lawyers who are largely ignorant of economic theory and trained to represent paying clients for billable hours (short term profit.) As in the corporate culture, the advice of trained economists is marginalized.

Quantitative myopia means running a business for shareholder gain rather than sustainability and long term profit.  This can be avoided through forward-looking, rigorous business practices that balance the needs of all stakeholders.

Snap principle of sound business management:

Invest in profitable lines of business and control for inevitable volatility.

Everybody’s Talking about the Hartford and Variable Annuities

Some questions people may be asking are how this happened, and how it will affect the Variable Annuity industry.

You can read my analysis on the Hartford’s exit from the life and annuities business on March 21 here. Forbes has weighed in now, as well as many other market watchers. Despite the apparent caving to the pressure of hedge-fund manager John Paulson, as the smoke begins to clear, the picture of a perfect storm emerges in 20/20 hindsight.

A Perfect Storm at The Hartford

Buying business through product feature enhancements: It all started when the industry fight over boomer retirement dollars led to  increasingly generous living benefit guarantees. Given the cost of these guarantees and the thin margins of variable annuities, The Hartford became vulnerable during the market collapse of 2008. VAs they sold offered generous living benefits and, in the 2008-09 recession, the cost of providing guarantees and death benefit step-ups caused them to suffer losses, since they were “giving away too much and not charging enough.”  according to one financial advisor. When the market tanked and real account balances dropped, benefits remained guaranteed, putting the company on the hook for large payouts.

Insufficient hedging: It soon became apparent that they hadn’t hedged enough of their exposure. Their share values tumbled, and they cut hundreds of jobs.

Neglecting distribution: Compounding this, the firm pulled back from selling new variable annuities, leading to an outflow of employee talent as annuity wholesalers jumped ship for competitors. Lacking support, financial advisors began to place their business elsewhere. Sterne, Agee & Leach analyst John Nadal says,

“One thing that investors don’t recognize as much as they should is the importance of maintaining distribution…So if your best talent leaves you you’re dead in the water.”

When The Hartford did try to recover with new annuity promotions last year, they had already lost the confidence of the financial advisors who were still wary of how committed the company was to annuities in the long run.

Shareholder activism: Majority shareholder and hedge fund manager John Paulson lost patience with The Hartford and demanded the company divest itself of the unprofitable lines of business. After responding that it would be difficult to spin off these lines of business, The Hartford succumbed to pressure and announced that it would focus on its strong property/casualty business, group-benefits coverage, and its mutual fund operation to concentrate on the “crown jewel” of the company: selling insurance on cars and homes.

More hard decisions to come: It seems to me that The Hartford was telling the truth here – it may be very difficult to divest themselves of their business. Without a viable distributorship, who wants to invest in a losing book of business? To sweeten the deal, they may well have to bundle it with their mutual funds or group business as well.

Growing Public Doubts about Variable Annuities

In the wake of the recent resignation of a Goldman Sachs employee  Greg Smith, whose New York Times op-ed charges that the investment management business had lost its moral compass and was failing to put the best interests of clients first, many critics have emerged to say that financial firms are selling complex products that buyers can’t understand.  let alone profit from them.  Market Watch’s report, “How to avoid becoming a Wall Street muppet” has called for  simplicity, and suggests that investors shy away from  complex, hard-to-understand financial products.

A complex product carries market conduct risk:The Hartford appears to be doing this in dropping their variable annuities line of business. In recent years, as annuities have become increasingly complex, they have gotten bad press and customer complaints have skyrocketed.  To be fair, some of the criticism is unwarrented, as market conduct complaints inevitably rise as returns fall and disillusioned investors lash out with frivolous complaints. But it is true that the complexity of the living benefits are difficult to understand and explain. In the absence of vigilance and the guidance of a financial advisor, it’s easy to make excessive withdrawals that violate the guarantee provisions, voiding guaranteed income guarantees, for instance.

Variable Annuities expose advisors  to risk too: Variable annuities, while designed specifically to mitigate financial risk, expose both clients and advisors to risk.

For example, on Oct. 23, 2011, a 12-person jury found former agent Glenn Neasham, 52, guilty of felony theft  for selling an annuity to an elderly woman.  On Feb. 29, 2012 the judge denied the motion for a new trial, refused to drop the felony charge to a misdemeanor and sentenced Neasham to probation and 300 days in jail. Martin plans to appeal. What did he do that was so egregious? He sold an Allianz MasterDex 10 annuity to an 83-year-old client who, as it turned out, has dementia, although Neasham was not aware of the fact and, according to reports of the trial in the local paper, the client was diagnosed with dementia several years after she purchased the annuity. According to  Life Health Pro:

It appears the jury believed Neasham stole Schuber’s money because her policy had a schedule of surrender charges. Also, they must have thought Neasham, who had no actual knowledge of Schuber’s likely Alzheimer’s, should have known she was suffering from dementia. Her condition has progressively worsened since the annuity sale date — Feb. 6, 2008. She couldn’t testify at trial….It was a perfect storm to punish Glenn Neasham, whose crime was simply selling an annuity.

In an interview, David Saltzman, president of EmpowHR, Inc., in Columbia, S.C., acknowledges he is not privy to all the facts in this particular case, although he says “It seems as though the agent did everything he should have.”  It appears that the annuity actually made money for the policyholder and that the relatives of the woman were consulted before the sale was concluded. Yet the State of California deemed the transaction illegal and charges were brought against the agent.

A miscarriage of justice to be sure, but one that plays to the sympathies of an angry and disillusioned public. California’s legislators have crafted one of the strictest elder abuse laws in the US.

Are Variable Annuities Too Risky?

The Insured Retirement Institute (IRI) reported that net VA sales in the third quarter hit $8.9 billion, a 38 percent rise from the same quarter a year ago and the highest level since 2007.

Yet, in the span of several weeks, even while there has been a rise in variable annuity sales, two large carriers announced their exits from the variable annuities business and another took a large hit on their earnings due to a previous closure of the product line.

  • In December, Sun Life announced it was discontinuing sales of VAs in the U.S.
  • In the same month, ING reported a $1.1 billion hit to its fourth-quarter earnings due to a VA block of business it closed in the U.S. back in 2009.
  • In addition, John Hancock said it was “restructuring” its annuity business saying: “Due to volatile equity markets and the historically low interest rate environment that is expected to continue for an extended period of time, Going forward, our current annuities will be sold only through a narrow group of key partners such as John Hancock Financial Network. John Hancock will continue its award-winning service to its annuity clients, who will see no change in how their accounts are handled.”

Is the sky falling? Not really. Much of this is due to the fact that ING is based in the Netherlands, and John Hancock and Sun Life have Canadian parent companies which,operate under different reserve and reporting requirements. ING must contend with Europe’s Solvency II requirements, which mandate greater capital reserves, according to Cathy Weatherford, president and CEO of the Insured Retirement Institute (IRI) in Washington, D.C. says that carriers are adjusting their product designs to address prevailing market realities. She states:

“We’ve seen significant product retooling over the past three years. We’ve seen significant hedging strategies,” she details. “Many have the ability now to move the money to less volatile fixed incomes if they start seeing market volatility. We know the living benefits aren’t quite as rich as they used to be. They’ve retooled them in a way that they are comfortable with. First and foremost in every insurer’s mind is that they want to be sure they have absolute financial strength so they can perform on the promises they’ve made to policyholders in the products they deliver. “I think each individual carrier makes their own decision based on their own business and distribution models, so I don’t think there is any wholesale answer around this question. But I do believe we are seeing the highest sales since before the meltdown in 2007 this year. So clearly there is available product, and advisors and consumers are gravitating toward them. We have strong carriers who have a robust product suite,” she says. “We’ve seen different strategies with low fees. So I think there are lots of options and opportunities for advisors and consumers.”

Some Thoughts on the Variable Annuity Market

The market remains viable: Health Life Pro says that the departure of the Hartford shouldn’t have much of an effect on the annuities marketCathy Weatherford has stressed that the insurance industry is strong financially and that lifetime income products continue to meet the needs of the retirees and pre-retirees, particularly baby boomers. And Prudential Annuities said that the company “remains committed to the annuity market, and we are comfortable with our overall risk profile.”

Agents need to do more due diligence: Many advisors don’t seem to think it will impact sales so much. In addition to variable annuities, and many have been diversifying into fixed indexed annuitiesMatt Golab, RIA and a licensed insurance agent at Aaron Matthews Financial Resources in Elk Grove, Calif.,says Hartford’s decision has both positive and negative implications for the annuity industry. It’s positive in the sense that a company that may not have been equipped to handle the long-term risk exposure of variable annuities has left the marketplace.On the negative side, one less carrier leaves consumers with fewer choices, and advisors with a tougher job in choosing the right carrier. “It puts a little more work on both the consumer and the advisor to really understand how the insurance company is set up with reserves, how they are taking on risk and what their obligations are for consumers in the future with such things as lifetime income plans and death benefit features, things like that,”

Carriers must better facilitate the sales process : I would add to this that carriers need to do much more to “foolproof variable annuity features by making them easier to understand and more difficult to misunderstand. Fine print disclosures are no longer enough. A concerted effort to educate consumers must be undertaken through better sales collateral and practices.

The potential impact of the Neasham case is a case in point. This case will likely mean a more diligent suitability review when dealing with senior clients due to the possibility of dementia. While most registered representatives are very thorough and consultative in selling variable annuities, suitability will become even more demanding, and may include an evaluation of the client’s medical history going forward, much like the kind of medical questions that you would typically find on a life insurance application.