A.M. Best: Reserves, particularly on older business, inadequate
OLDWICK, N.J., December 22, 2014—A.M. Best has released a Best’s Briefing exploring how profitability struggles in the U.S. long-term care (LTC) sector persist. The ability to sustain profitability in LTC has eluded insurers for more than a decade as issues relating to older legacy blocks – primarily written before 2003 – continue to place a drag on current profitability.
The briefing, titled “Uncertainty in Long-Term Care Continues to Plague Profitability,” states that A.M. Best continues to maintain a negative view on the LTC segment and remains concerned that the current amount of reserves, especially on the older blocks, may not be adequate despite current levels of strengthening.
LTC insurance is a guaranteed renewable product and is priced on an issue age basis. Earlier policies were priced using what are known now to be inaccurate actuarial assumptions for claims costs, lapses and investment returns, resulting in the product’s poor financial performance. Today, many of these legacy blocks remain on insurers’ books long past the point originally assumed when the products were priced.
Overall, very few carriers writing LTC products have reported profitable operations on a statutory basis, which further impacts their capital positions and challenges their ability to demonstrate the adequacy of their LTC reserves. A.M. Best believes companies with legacy blocks of business will continue to struggle to manage these blocks profitably. Those with more recent vintages still have found pricing to be inadequate to attain targeted returns.
Finally, because legacy books were mostly priced using less conservative interest rate assumptions, the prolonged low interest rate environment places a further drag on the product’s profitability. Rate increases may be a company’s only option to maintain profitability. However, this creates further issues such as: required state approvals for product changes, increased expenses, greater marginal loss ratio, customer dissatisfaction and anti-selection.
To access the full, complimentary copy of this briefing, please visit here.
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