photo by Taber Andrew Bain
To the surprise of nobody who has read anything we have written on the topic, the ground is rapidly crumbling beneath the long-term care insurance industry. Genworth Financial, a major LTC player, has been caught in the landslide.
Genworth recently posted a quarterly loss of $844 million, driven largely by costs associated with its LTC products, according to Bloomberg. The loss was the largest since Genworth spun off from its parent company, General Electric, in 2004.
Genworth CEO Tom McInerney said in a statement, “The turnaround in this business will be more difficult and prolonged.” But doubling down on long-term care coverage, of which Genworth is the largest vendor, is ultimately going to be a losing proposition, not simply a challenging one.
That is because the reasons that Genworth’s policies were grossly underpriced in the first place are unchanged today and unlikely to change in the future; in some respects, the problems are liable to become more acute. People are living longer than ever, on average, and need a higher standard of care as they age. This means the costs are going to continue to swell.
On a call with analysts, Genworth management fielded a question about whether it should put long-term care insurance into “run-off” - that is, wind down the business by halting sales of new policies.
The response was that Genworth considered running off its LTC insurance business, but decided to hold out because state regulators are likely to approve rate increases on previously sold coverage. The company has stopped selling policies in the states that declined to approve higher rates: Massachusetts, New Hampshire and Vermont. The other 47 states had reached agreements with Genworth by the end of October.
This decision implicitly admits that even recently sold policies are probably still underpriced. Insurers have consistently underestimated how fast costs of care will rise and how many customers will both buy and use their LTC policies. And Genworth’s decision also overlooks the major problem of adverse selection: As premiums rise, the healthiest customers, who are least likely to need expensive benefits, have stronger incentives to drop their policies, leaving the insurer with only the sicker and more costly portion of the risk pool.
The other argument in favor of holding on in the long-term care market is that low interest rates have resulted in lower than expected returns on invested premiums. This observation is true. But it is also a problem that affects all sorts of insurance, not only long-term care products. Yet only about a dozen companies sell meaningful numbers of LTC policies these days, compared to over 100 companies that did a decade ago. Those remaining companies have raised prices and deny coverage to about one in five individual applicants.
Genworth’s stock tumbled 37 percent the day after it announced its financial results, and the company’s bonds are at risk of being downgraded to sub-investment grade status (generally known as “junk”) at Moody’s. “We believe the company remains exposed to further, significant deterioration in its legacy block of business,” Moody’s said.
Genworth argues that LTC insurance is a product that the market needs. This is untrue. LTC insurance is fundamentally an unsustainable product that cannot work in the long term, precisely because so many people are apt to file claims against it. We have written as much many times before, and nothing has changed.
What the market does need is a solution for the problem of how to affordably care for an aging population. LTC insurance does nothing toward this end, even though states like it because state regulators want to shift costs away from Medicare and Medicaid. Doing so only moves those costs, not reduces them.
What we really need are more cost-effective ways to care for people - ideally at home, whenever possible. An army of people, largely outside the country, is available for this work, but we’ve provided no effective mechanism to get those people here. And increasingly, various rules make it harder for a family to hire household employees. This trend forces older Americans and their loved ones to use home aide agencies, which are often more expensive than hiring help directly. Or, in many more cases, it forces them to institutionalize individuals who really could remain at home if help were available, driving costs of care higher still.
LTC insurance is proving that it is not a solution. It is not even a viable product. As it gradually fails, maybe we will turn our attention to the real problem.