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The Long-Term Care Landslide

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.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

The views expressed in this post are solely those of the author. We welcome additional perspectives in our comments section as long as they are on topic, civil in tone and signed with the writer's full name. All comments will be reviewed by our moderator prior to publication.

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3 Responses to "The Long-Term Care Landslide"

  • Raymond Lavine
    November 18, 2014 - 5:53 pm


    You have your opinions and thoughts about extended extended care benefits. You are not an advocate for LTC benefits.

    Where we do agree is that these plans were not priced properly, underwriting was not as careful as it should have been, and there is a lot of hubris about the business.

    I receive calls from people who need assistance with understanding their benefits or whose parents or they are using LTC benefits. They are pleased they own the and are pleased they own policies. Not because they wanted to own a policy, something in their lives suggested that they should own a plan. A wealth manager or advisor, an agent, being a caregiver and how the consequences of that affected their lives.

    There is no way in this culture that we will have universal coverage to provide benefits for people who need some level of care services.

    What does owning an extended care plan really do:

    1. It may not lower the cost of care services but it does not disrupt a person’s estate or commitments towards the future.

    2. It allows families to be families. The cost of care affects families. Careers, saving for retirement, family life, and the emotional cost of not having to make choices whether you take care of those you love or have your life and manage the care giving of family and friends.

    3. LTC allows people to continue their freedom. Oh yes. Just because you have a chronic ailment does not mean you cannot enjoy your life….you just need help. Look around you when you are in a restaurant, travel, or in any public area. There are people who have chronic ailments but they still get out and do things. How would they do that if they did not have assistance.

    4. Not having a are plan will disrupt everything you have or will want to accomplish in your life if the care giving issues lasts for an extended period of time.

    Extended care plans have their challenges but the platforms are in place with plans which are more stable for future premium increases. In addition, underwriting is more cautious.

    5. There are alternative products which are of value to people. Asset and linked products. They have their issues and will not solve everyone’s problems or take care of all of their hopes and dreams.

    6. The CLASS Act was designed to offer people LTC benefits. It was an interesting idea but actuaries informed the President and Congress that it was not financially viable. I was take out of the ACA act in December, 2013.

    Many things are not a true solution but we have the benefits we have until we can decide to do things better. What solutions do you offer?

  • Eric Johnson
    November 20, 2014 - 2:26 am

    My only disagreement on this piece is the claim that Genworth will be subject to adverse selection. Quite the opposite. This isn’t ACA where Genworth has to accept anyone who applies regardless of pre-existing conditions. On the contrary, Genworth within the last year has become by far the most difficult to get long term care policies approved through medical underwriting and most recently has included family history in its decision – much like life insurance has done for over 100 years.

    John Hancock, Mutual of Omaha, TransAmerica – the other big 3 behind Genworth, have all had the same problems and are fixing them through higher pricing and stricter underwriting. Two of the other largest companies in LTCI, MetLife and Prudential, have gotten out of the business altogether. While they still have to service existing contracts, they now have no way to remedy past underpricing mistakes if state insurance commissioners deny their price increase requests.

    Genworth also continues to allow informal caregivers (those who are qualified but no longer work through an agency) to provide care in the home if the state approves. TransAmerica and John Hancock, on the other hand, have shut that down, which does mean it will become much more costly to receive care at home, pretty much guaranteeing that the policy holder will have to use the majority of their monthly benefits with those companies.

    While I wouldn’t bet on the future viability of any specific company, when it comes to Genworth’s long term care business, the steps are being put in place, due to a change in CEO in the last year. It will be ugly for awhile, but they are doing what it takes to slowly turn this ship around.

  • Karen Lorenzo
    November 20, 2014 - 9:59 pm

    Genworth may have been facing a difficult time due to the challenges in their long-term care insurance division, but ltci is still the most viable way to protect yourself from its devastating effects. The problem is that most people ignore the significance and importance of having one due to their mentality that the government will take care of them once the need for care arises. Who would want to buy an expensive product when it is being offered for free through medicaid. Americans need to understand that long-term care insurance isn’t all about financial security and asset protection, the best value a person can get from it is the ability to maintain your dignity, quality of life and independence even if you can no longer take care of or decide for yourself. those people who rely on medicaid or even engaged in fraudulent activities to qualify for medicaid will be enjoying minimum level of care in a facility which they may not desire to spend the rest of their lives. Most of us are aware that seniors prefer to be cared at home, the last place they would want to be is in a nursing home, unfortunately, those eligible for medicaid is not capable of aging in place, based on http://en.wikipedia.org/wiki/Long-term_care, majority of the programs expenses are focused on nursing homes.
    While some of the biggest names in the insurance industry have ceased to sell long-term care insurance, those who are still in the market are offering wonderful ltci products that were carefully price to ensure that the rates will be more stable to avoid future increase. Of course this product maybe expensive but compared to the cost of care, ltci is a more affordable alternative to manage future long-term care risk – a risk that is increasing as time goes by.
    I do agree that we need a more cost-effective ways to care for people especially at home, but we can’t come up with an army of people because statistics revealed that due to the increasing demand for ltc, there will be shortage of caregivers. According to long-term care statistics at http://www.longtermcareprimer.com/basics/ltc-statistics, there are already 42.1 million unpaid family caregivers in 2009. In addition, insurance companies are selling expensive ltci policy because the cost of care is even more expensive. In fairness to Genworth, they have added more than $500million dollars to their ltci reserves to make sure that policyholders will be paid. It may not be a good news for stockholders but definitely good for policyholders.