LTCi Insurers Struggle With Past Underpricing, Present Profitability

A.M. Best Special Report: Pre-2003 pricing continues to drag down results

OLDWICK, N.J., September 16, 2013—The individual long-term care (LTC)
market has experienced numerous challenges over the past decade. The older
blocks of business written before 2003, which were priced based on
inadequate assumptions regarding claims costs, lapses and investment
returns, continue to drag down companies’ results, requiring rate increases
and reserve strengthening.

More appropriate assumptions with improved 
historical data now are being used in pricing and underwriting, but pricing 
remains inadequate and products have become extremely expensive. In
addition, the LTC insurance market has continued to battle the challenges
of lower than expected lapse rates, an extended low interest rate
 environment, high unemployment and longer claim periods, which have
prompted many LTC insurance writers to either exit the market or pare back
their LTC product offerings over the years.

A Capital-Intensive Product

As a capital-intensive product, LTC will continue to challenge small to
 midsize or monoline writers to maintain the necessary capital levels. It is
more difficult for smaller companies—particularly mutual companies—with
limited or no access to additional capital that have seen absolute and
risk-adjusted capitalization weakened by the last recession and the
continued low interest rate conditions.

The LTC market continues to be concentrated, with the top 10 insurers
accounting for approximately 90% of sales. According to LIMRA, Genworth
 Financial, John Hancock (a subsidiary of Manulife), Transamerica, 
Northwestern Mutual, Mutual of Omaha, New York Life and Massachusetts
Mutual Life have the most individual LTC insurance in force. Genworth
 remains the largest of the individual LTC writers.

More appropriate assumptions with improved 
historical data now are being used in pricing and underwriting, but pricing 
remains inadequate and products have become extremely expensive.

The barriers to entry
remain strong, as the product requires significant capital investment for
initial development and carries stringent statutory reserving and ongoing
capital requirements. A.M. Best Co. continues to believe the larger, more
diversified and better capitalized companies will remain active in this
market. Contrary to the industry trend, Thrivent Financial, which last
issued new individual LTC policies in 2003, recently announced it would
resume the sale of LTC products to its affiliated members.

To access a copy of this special report, please visit
 here.

A.M. Best Company is the world’s oldest and most authoritative insurance
rating and information source. For more information, visit www.ambest.com.