The New Finance of Longevity

COVID-19's Potential Impacts on Long-Term Care Insurance

Including LTCI delivery, demand, and markets, as well as new public policy considerations

A new report from the American Academy of Actuaries details how the past year is expected to have pervasive impacts on the health care system. To view full report visit here.

WASHINGTON—A new issue brief from the American Academy of Actuaries applies actuarial expertise to provide an understanding of how COVID-19 could impact long-term care insurance (LTCI), including LTCI delivery, demand, and markets, as well as new public policy considerations.

“The elderly, who most benefit from long-term care services, have as a group experienced an outsized toll from the COVID-19 pandemic, adding to our sense of need to assess the pandemic’s consequences for long-term care insurance,” said Bruce Stahl, a member of the Academy’s Long-Term Care Reform Subcommittee, which authored Impact of COVID-19 on Long-Term Care Insurance. “Adjustments to underwriting and persistent low interest rates are COVID-19-related impacts already clearly affecting LTCI. More time and experience will tell if there are other consequential effects, such as a shift from facility to home care settings, or increased care needs for COVID-19 survivors.”

Morbidity

Claim Incidence Rates

It is possible that LTCI claims incidence rates could either increase or decrease in the short term as a result of COVID-19. Some factors may reduce incidence rates, including:

Mortality due to COVID-19 among those that would otherwise begin receiving formal care.

  • Concern about entering a nursing facility where COVID-19 infection and mortality
    rates have been higher than observed across the general population.
  • Fear of having an infected home health worker entering the home.
  • Hesitancy to visit doctors to seek medical clearance for LTCI claim eligibility.
  • As more Americans work from home, a shift toward informal care with more sources
    available for such informal care.
  • Fewer injuries as people are reducing activity, shifting away from driving, reduced
    vacations, and other physical activities in favor of isolation-type activities.

Data through the second quarter of 2020 suggest that some carriers are, in fact, experiencing reduced incidence rates in the short term.

At the same time, there will be factors that may increase incidence rates, such as complications or health impairments affecting COVID-19 survivors. Though there remains significant uncertainty concerning the long-term health impacts of COVID-19, certain complications may lead to higher incidence rates if survivors have decreased ability to perform activities of daily living (ADLs). While more speculative than empirical at this stage, it is hypothesized that, during the pandemic, more people will gain weight and be less fit due to increased stress partially driven by less social interaction, gyms being less accessible, and factors relating to other local restrictions.

LTCI Claim Termination Rates, including Claimant Mortality, Recovery, and Exhaustion of Benefits

COVID-19 is generally expected to increase claim termination rates in the short term. This is fueled, at least in part, by increased mortality rates among older people with underlying health conditions who contract COVID-19. People in LTC facilities appear to have been heavily impacted. Generally consistent with the AARP findings cited earlier, the New York Times reported in June 2020 that more than 40% of COVID-19 deaths were linked to nursing homes.

Early data support the notion that LTCI claim terminations will increase in 2020. One carrier (Unum) announced publicly that LTC claimant mortality increased by 30% in the second quarter of 2020.

As we move to longer-term impacts on LTCI claimant mortality, items to consider include:

  • Will the increase in claimant mortality in the short term create lower claimant mortality long term? Is the impact mostly limited to those who would have experienced earlier claimant mortality rates anyway?
  • Will a deferral of claims lead to increased future claimant mortality as insureds may be less healthy upon claim? Correspondingly, would recoveries and benefit exhaustions be fewer?

Aside from the disabled life mortality impact, there may also be an uptick in claim recovery rates as insureds discontinue formal care over concerns of becoming infected at their facility or through a home health worker. To a lesser extent, facility terminations may be compounded as families explore home care options that may not have been considered prior to the pandemic. This seems to be more likely in the short term with some potential ramifications longer term.

All of these factors strongly suggest likely impacts in LTCI claim terminations, particularly in the short term extending to the longer term.

Benefit Utilization

In the short term, the difficulty in attracting workers due to medical concerns and temporarily increased unemployment benefits may increase LTC costs. This may be offset as those who need care reduce home care visits and thus home care utilization. These impacts may vary dramatically across different parts of the country.

The elderly, who most benefit from long-term care services, have as a group experienced an outsized toll from the COVID-19 pandemic, adding to our sense of need to assess the pandemic’s consequences for long-term care insurance...

In the longer term, if utilization in facilities decreases as a result of the pandemic, this could mean that insureds are either receiving services in a home care setting or delaying services all together. Either of these would seemingly drive higher utilization in the future, with the former driving higher benefit utilization in the home care setting and the latter increasing utilization in all settings.

Persistency

Mortality

Short-term mortality impacts from COVID-19 have been disproportionately concentrated on those in LTC settings. Accordingly, many actuaries may expect short- term increases in claimant mortality, with the potential to decrease claim reserves. Impacts from this may vary in both magnitude and timing as spikes occur in different parts of the country at different times.

If one views COVID-19 as likely to have residual health impairments on survivors, long-term future mortality rates may be higher than pre-pandemic rates. It is too early to say whether such long-term impairments may exist and, if so, how they will manifest themselves. For instance, will the health impairments a) disproportionately impact older ages (consistent with COVID-19 case mortality rates) and therefore increase the future mortality curve, or b) disproportionately impact younger ages (who had low case mortality rates, but potentially higher infection rates), leaving an elevated but flattened mortality curve. This issue warrants careful consideration and monitoring over coming years.

Voluntary Lapse

Shifting attention to voluntary lapses, short-term factors may point to the potential for a decrease in LTCI voluntary lapse rates. Insurers have extended premium grace periods, either voluntarily or because of state mandates, further reducing already-low lapse rates in the near term. However, macroeconomic conditions may partly offset this phenomenon. Because the U.S. economy entered recession in the second quarter of 2020, insureds living on fixed incomes may face financial pressure to lapse their policy in the face of more pressing needs.

The long-term impact of lapses may be similarly important from a liability perspective. During 2020, there was significant media coverage surrounding the elevated levels of COVID-19 infections and deaths in nursing homes. Further, early data in some states suggested that a majority or near majority of COVID-19 deaths were associated with residents in nursing homes, though this trend appears to have moderated as the pandemic progresses. In the long term, this preponderance of coverage could contribute negatively to the desirability of nursing homes, and assisted living facilities more broadly, putting upward pressure on LTCI lapse rates. As a result of fears associated with living in a facility, the perceived value of policies may decrease, which leads to the insured choosing to lapse their policy. Such upward pressure would presumably increase if companies offer some form of cash surrender benefit/policy buyout option in the future.

At the same time, economic conditions may put further upward pressure on lapse rates. The U.S. economy officially entered recession in Q2 2020, according to the National Bureau of Economic Research. Difficult economic conditions may force some insureds to lapse their policies.

Capital Markets

Concurrent with the pandemic, interest rates have decreased markedly, below rates that were already perceived as being at historical lows, and stock market volatility has increased. More specifically, U.S. Treasury rates dropped sharply by March 31, 2020, partially offset by a widening of credit spreads. It should be noted that credit spreads generally narrowed by June 30, 2020. Pre-pandemic, there existed significant uncertainty with respect to default rates fueled in part by struggling brick-and-mortar business, global trade issues (e.g., tariffs, intellectual property), and U.S. energy production due to falling fuel prices.

COVID-19 has helped accelerate short-term actual and expected defaults by shifting consumer behavior, real estate supply and demand, and other drivers of defaults. If defaults continue at elevated levels, this may keep downward pressure on net interest rates. It is possible that longer-term defaults may be shaped by more permanent shifts in both consumer behavior and the economy (e.g., global supply chain changes, automation).

Low interest rates and/or stock market volatility may put pressure on insureds’ ability
and willingness to continue to pay LTC premiums. From an insurer perspective, low interest rates may lead to higher LTCI reserve requirements for year-end 2020. Insurance companies may have limited ability to offset the upward pressure on reserve requirements through inforce premium rate increases; states generally do not consider actual investment returns in premium rate increase requests. Implications of current capital market conditions on various LTC stakeholders are considered later in this issue brief.

Conclusion

As of the latter part of 2020, there remained considerable uncertainty concerning the impacts that the pandemic will have on actuarial experience, both short-term and long- term. While a clearer picture of short-term experience is starting to emerge, it will take many years for long-term experience to emerge, stabilize, and allow for accurate measurement. This issue brief lays out considerations as actuaries are beginning to undertake the process of determining how the pandemic will influence LTCI blocks of business.