Moody’s recently painted a predictably glum future for the long-term care insurance (LTCi) industry, calling it “uncertain...as it may be difficult for firms to profit from the product.”
Laura Bazer, a Moody’s vice-president, described the challenges facing the 40-year old product line. "The relative newness of LTCi and the long-tailed and complex product structure...make it difficult to price...profitably," Bazer said.
The dominant narrative in 2012 has been the number of carriers exiting the industry, always spun in one direction: "The product isn’t viable."
The media have already reached their conclusion, and now they spin everything to fit their narrative.
Allow me to suggest another point of view: When carriers exit the field it's a sign of healthy competition; their departure is the natural disposition of capitalism. There’s nothing catastrophic or explosive about it, and it goes on every day in every industry, routinely.
If we're going to wring our hands over the number of carriers "left" that now offer LTC insurance, it presumes we know the "correct” number of carriers that should offer LTC insurance. All right, how many is the right number? Is it two, or 20, or 200? As we formulate an answer, let’s keep the following in mind:
1. LTCi didn’t spring forth in 1972 like a “Big Bang” and expand to 200 carriers in milliseconds. Instead, our industry has evolved like a Bell curve—first there were a few pioneers, followed by imitators.
2. By comparison, how have other maturing industries evolved over time in terms of the number of competitors? Do consumers feel like we have adequate choice in the number of major airlines, cellular phone carriers, political parties, or fast food chains? For many categories, it would be unusual to support more than three to five national power players, or 10 to 12 on a regional or specialty basis. Would you be surprised to learn that 20 LTCi carriers sold new business in 2011?
3. My standing proposition to anyone who would cast a mote in LTCi’s eye is to respond with, “What’s the alternative?” That’s not simply a flip attempt to deflect attention from our own industry’s shortcomings—rather, it’s a reminder that until the United States can answer the question, private LTCi remains the most viable solution.
Neither Medicare, Medicaid, the VA, nor any other “pay-as-you-go” funding mechanism is prepared to absorb the Age Wave. (Shall we even mention CLASS, which counted its “reserves” as Affordable Care Act revenue?)
For some reason, observers are positively confounded and hung-up on the number of carriers writing new LTCi business.
While that number has stayed fairly constant during the past two decades (between 20 – 35), what’s changed to a far greater degree has been the concentration of business among an elite few at the top.
As proof of consolidation, in 1999, it took 12 carriers to produce 80% of all LTCi policies purchased (400,000 policies). By 2005, it took just 10 carriers to produce 80% of all LTCi policies (250,000 policies). By 2010, it required just 7 top carriers to sell 80% of new policies for the year (about 190,000). So far this year, the top 80% of new business is concentrated in about the top six carriers (although to fully encompass 95% of the individual market we do need to include a full complement of 17 insurers). To summarize, from 1999 to 2012 we saw the number of carriers who produced the same proportion of business (80% of the industry’s total) cut in half (from 12 to 6).
So the dominant trends that emerge are a reduction in total new policy volume, a huge reduction in new policy premium (compare 2001, when the Top 10 carriers wrote $992.4 million in inflation-adjusted new business versus a decade later, in 2011, when the Top 10 carriers wrote $508.3 million in new business), and most importantly, a concentration of market share in a shorter and shorter list of power players. Although this is predicted by economic theory, and a normal part of capitalism, for some reason Moody’s has a problem with this.
This is why we need to focus on the proper take-away. This is why we return to my initial question, "How many is the right number?"
It's not particularly relevant or worrisome that the total market size was $992 million and is now only $508 million. What matters is how many carriers it can support and whether that number has found its equilibrium or is still working toward it. In other words, $508 million can only be divided so many ways. In the "old days" that much annualized premium would have supported around 10 carriers, not 20. This is why I’m not particularly heartbroken when carriers exit the business.
I know there’s a certain number we are working our way towards. I don’t know what it is, but supply and demand suggest this industry will belong to the survivors.