Long term care distributors across the country were sent reeling on September 20th, when John Hancock Life Insurance Company announced an average 40% rate hike for most of its in-force LTC policies. Hancock told its distributors it would be filing for increases for in-force LTC policies in all states in September and October. Depending on the product, rate hikes submitted to state regulators range from 17% to 72%, according to an agent who attended a telephone conference where Hancock, a division of Manulife Financial Corp., announced its increase.
Reactions among LTC distributors to the increase ranged from shock to grim acceptance. "We simply have not sold he masses," said Phyllis Shelton, president of LTC Consultants and LTCi-Training.com, of Hendersonville, Tenn. "If we had, the risk would be spread more evenly, and the insurance would cost less for everyone."
At that same teleconference, Marianne Harrison, president, John Hancock Long Term Care also announced Hancock had suspended sales of group LTC insurance policies as it reviews its claims in that market.
The increase "doesn't bode well" for the LTC insurance industry, observes Peter S. Gelbwaks, president of Gelbwaks Executive Marketing Corp., Plantation, Fla.
Gelbwaks also says, however, he thinks the rate hike was necessary and points out that in the past few years, a number of LTC carriers have raised rates for in-force policies.
"90% of Americans still haven't purchased a [LTC] policy, one reason being it's too pricey," Gelbwaks says. "At the same time, the experience of the industry is proving, based on usage, that the products are actually underpriced. We need to reevaluate where we stand and look at product offerings more closely," he says.
If Americans think the product is overpriced, the industry needs to show them otherwise, he says. "We have to change our message and tell people it's such a good buy because people are using it. We are paying millions in benefits."
He predicts that single-premium LTC product sales will get a large boost as people look for guaranteed rates for coverage.
Another agency principal says the top concern is to keep the product financially healthy and sustainable over time.
"Advisors who sold these policies are not going to be happy, because they didn't anticipate the increase," says Tom Riekse Jr., managing principal at LTC Insurance Partners L.L.C., Libertyville, Ill., a brokerage general agency. "To Hancock's credit, although premiums are going up, they are paying $1.5 million in claims a day."
Cameron Truesdell, chief executive of LTC Financial Partners L.L.C., Kirkland, Wash., thinks meager investment returns have hit all insurers far harder than anyone would have thought possible.
"It used to be a reasonable assumption they'd get an investment yield of 5%. Instead, it's been 2%," Truesdell says. "The consumer got one heck of a deal for 20 years."
Agents get skittish when carriers raise rates, Truesdell observes, but his experience has been that lapse rates following in-force increases have totaled no more than 1% of policies. (One reason that is the case is because when LTC carriers raise in-force rates, they allow policy owners to convert to a policy with reduced benefits--as Hancock is doing with its latest increase.)
"LTC insurance really is entering a stage of new realities," adds Jesse Slome, executive director, Association for Long Term Care Insurance, Westlake Village, Calif. "Basically, more people are going on claim, claims are lasting longer, and insurers' investment returns are lower than ever. You have the triple whammy."
Slome adds that LTC insurance agents should view the increase as both good news and bad news. "The good news is that more people are using it than expected, they're on claim longer and they're being paid more money," he says. "The bad news is that because claims are so much higher, premiums are more costly."
Hancock says the increases were not a result of the recent poor economic climate. Rather, its decision was based on a recent extensive claims study that examined LTC morbidity and claim trends based on actual experience. The last time Hancock undertook a thorough LTC claims review was in 2006.
This year's study encompassed both open and closed claims, looking at all LTC claims Hancock received from 1990 to 2010. The study showed unfavorable claims patterns, with twice the number of claims as in its 2006 study. For policy holders aged 80 and up, it had four times as many. The severity and duration of claims in 2010 also have been much higher than in 2006, Harrison says, while claims terminations were lower than expected.
Mortality improvements have led to more people reaching the age where claims are more likely to occur, Hancock said.
"Put simply, more people used the insurance than anticipated, reinforcing the value of the product to policyholders but creating a pricing issue," the company said.
In addition, the duration of claims was longer than expected, and fewer people terminated their policies than it had projected, Hancock said.
The proposed rate increases are subject to acceptance by some states, although a number of states do not require approval by their insurance regulators for LTC premium increases to go into effect.
To accommodate policy holders who could not afford the increases, Hancock is offering a range of options involving reducing benefits to keep premiums close to their current level. For example, insureds who purchased 5% compound or 5% simple inflation coverage will be offered reduced inflation coverage such as 4% compound or 4% simple increases.
The company offered similar options to Federal employees last year when it raised rates by 25% on group policies sold by its subsidiary, Long Term Care Partners L.L.C. The Federal policies would not be affected by the new rate increases.
"We are trying to do whatever we can to offer an array of options," says Harrison. In addition to cutting back on inflation protection, policy owners can reduce the benefit qualification period or reduce their daily or monthly benefit amounts.
LTC producers have complained for years about past increases by carriers, which they have blamed for recent declines in sales for LTC policies. Although individual LTC insurance sales rose 13% in the first half of this year, this followed a decline for most of the previous seven years, according to a recent study by LIMRA.
"Yes, we are aware that this would hurt sales," Harrison says of Hancock's latest increase. "But the economic environment hasn't helped, either."
Aside from the Federal program, Hancock's last LTC rate increase was in 2008, when it increased in-force rates 14% on average on three policies it no longer sells.
The latest increase will affect most individual LTC products except for Hancock's Leading Edge and Customer Care II enhanced products, the company said.
If the increase sought this year goes forward, Hancock expects to be able to meet all its LTC obligations in the future without further rate hikes, Harrison says. Harrison estimates 80% of Hancock's in-force LTC policies would be affected by the latest increases. It now has about 1.5 million policies in force.
Hancock expects the first round of state acceptances of its LTC in-force filings would be announced in January 2011 and go into effect in April. Rate increases for remaining states would go into effect over the rest of 2011, it says.
A recent study of LTC insurance producers by AgentMedia and the Association for Long Term Care Insurance found 84% sold Hancock products--the highest of all LTC insurers that did not have a captive sales force. In addition, 38% said they write most of their LTC insurance business with Hancock, followed by 31% who said Genworth Financial had most of their LTC business. AgentMedia is part of Summit Business Media, the parent company of National Underwriter.
Ironically, at the time the study was conducted in May, 32% of producers rated Hancock as the best carrier for maintaining stable premiums, higher than for any other carrier.