Is Your Long-Term Care Policy Safe?

Conseco's move earlier this month to shift roughly 150,000 of its older long-term care policies to a trust overseen by Pennsylvania insurance regulators is a shocker.

Notwithstanding a comforting letter to affected policyholders from C. Everett Koop, former U.S. surgeon general, the jettisoning by Conseco of a longtime money-losing book of business means that the policies are now self-funding and can no longer look to Conseco to provide financial support.

Long-term care (LTC) insurance is a complex product that provides financial support for a range of assisted-living expenses for people who are unable to perform certain daily activities on their own, such as feeding or bathing themselves.

Roughly 8 million LTC policies have been sold nationally. Most are purchased years in advance of any claims being made on the policies and are, in fact, marketed as a product that is more cost-effective if purchased early. Thus, issues about the financial condition of the earliest block of policies that was sold naturally raises questions about the viability of other policies.

In approving the transfer, the Pennsylvania department noted that Conseco had added $175 million in reserves for the policies (bringing total reserves to about $300 million) and that the policies are being placed in a nonprofit trust, meaning they will not be managed to generate a profit. However, it's also possible that LTC policyholders in the new Senior Health Insurance Co. of Pennsylvania will face higher rates on their policies, reduced coverage levels, or some combination of the two. (Pennsylvania caught the Conseco bouquet because its LTC unit is domiciled in that state.)

The alternative was likely insolvency of the Conseco unit holding the policies, says Pennsylvania State Insurance Commissioner Joel Ario. "The holding company did not have the legal obligation to put more money in, and the board [of directors] would not have put money in."

Ario is under no illusion that the future for these policyholders will be easy, and he says the same is true for LTC policyholders in other companies who bought their policies some time ago, particularly if those policies have been placed in what's called a closed block of business. Such a decision means that the older policies can't benefit from being pooled with newer, more profitable business. They can thus face problems should pool expenses exceed estimates. "It's a challenging environment," Ario says.

"The plan here to survive is to go out for additional rate increases" if needed, Ario says. He acknowledges that higher rates would be tough on people living on fixed incomes, so "if there is a rate increase, all policyholders must be offered the opportunity to accept reduced coverage at the same rate."

"At the end of the day, the real question is whether the reserves and the capital funding transferred to this trust are sufficient to support the liabilities," says Rosemary Mirabella, who follows Conseco as an analyst at insurance ratings provider A. M. Best Co. "That's hard to say, truthfully. . . . That block [of policies] is a problematic block. Conseco has spent close to a billion dollars trying to fund it."

Older LTC policies have been an industry problem. Many were sold years ago when the concept of long-term care insurance was relatively new. With scant actuarial evidence about ultimate policy costs, the industry in general badly underpriced the early policies. Over time, LTC policyholders have exhibited sustained longevity gains, meaning policyholders are living longer than expected and posting correspondingly higher claims for their LTC policies.

Mirabella added that Conseco is more reliant on its LTC business than other leading LTC sellers, a list that includes Genworth Financial, John Hancock, and MetLife. Best gives Conseco a "B+" financial-strength rating, which is its lowest "secure" rating. The other three all receive superior ratings, although Best has placed Genworth's rating under review with a negative outlook.

"It's an industry problem," says Carl Austin, an assistant vice president at Best who tracks the overall LTC sector. "You need substantial rate increases to support these policies over time," which is a financial hardship for policyholders, many of whom are on fixed incomes and not able to easily absorb premium increases. Most carriers have put in for one round of rate increases on their older policies, and further hikes would not be surprising.

"Products sold today are more appropriately priced than they were in the past," Mirabella says. Even so, she thinks "the industry is going to have to evolve to a different level of coverage" that features shorter coverage periods and lower benefits.

While owners of older LTC policies may be in a bind, newer policies have been sold on more flexible and more accurate underwriting terms. Policyholders generally have coverage options if rates are increased, although a pattern of too many rate hikes badly weakens the marketing argument that people should lock in advantageous rates when they're younger.