Individual long-term care (LTC) insurance is back in the spotlight after a hard-hitting and controversial analysis last week highlighted General Electric’s (GE) risk exposure from that part of its portfolio.
The company has fiercely denied the categorization of its finances by a whistleblower, while mounting a strong defense of its financial practices. “We operate with absolute integrity and stand behind our financial reporting,” GE’s vice president of investor relations Steve Winoker wrote in his latest newsletter on Monday.
While GE does have heightened exposure to long-term care, the problem is not isolated to the troubled industrial giant. That’s because all the industry’s players are confronting a challenge they can’t seem to solve: Accurately pricing the future, at a time when people are living longer, and costs of care have soared.
The lifespan of a policyholder affects pricing, but that’s a hard thing to predict —especially as the average lifespan of Americans has increased significant over time.
Inaccurate assumptions nearly decimated the industry nearly a decade ago, and companies continue to struggle to offer value as premiums jump.
A new report from Fitch Ratings analyzed companies managing individual long-term care policies and reinsurance for the same, and determined the industry is still not getting it right.
Fitch’s data shows five companies face the worst outlooks to pay out claims on policies that are more than a decade old due to inadequate reserves. That is the key risk factor that caused a mass exodus in the industry in 2010.
Those companies include General Electric; Genworth Financial (GNW), which is in the process of being sold to China Oceanwide Holdings; UNUM Group (UNM); and Senior Health Insurance Company of Pennsylvania.
Genworth told Yahoo Finance in a statement that it had been working to improve its LTC portfolio over the last decade. The company said it “strongly disagree[s]” with Fitch’s conclusions about Genworth’s assumption of coming premium hikes.
“We believe our reserving process is appropriate based on current GAAP and SAP reporting requirements, and Genworth has included fulsome disclosures regarding the LTC business and its risks in our annual and quarterly disclosures,” Genworth said.
“We regularly monitor our actuarial assumptions as claim experience develops and increases reserves when necessary,” the statement read.
When policies were first introduced in the 1960s, they did so with limited historical data on LTC costs trends. They were priced with consideration that seniors, who would likely be using them, would be on fixed incomes in the future.
However, people are living longer and have more acute health care needs than what was forecast. And because policies did not build up adequate reserves, companies are suffering.
Fitch found that “many insurers remain under-reserved against the ultimate losses associated with this risky product exposure,” the report said.
“This view remains exacerbated by the notable variability in returns and profitability among insurers’ blocks of business, particularly those legacy exposures underwritten before 2010,” they added.
In a lengthy statement provided to Yahoo Finance, a GE spokesperson took issue with the concerns raised in Fitch’s report.
“Our current reserves are well-supported for our long-term care portfolio characteristics,” the statement read in part. GE added that its LTC holdings contain “important characteristics” that should be invoked when comparing them to other long-term care portfolios.
“Our future liabilities depend on variables that will play out over decades, not years, and are assessed using rigorous annual testing processes, sound actuarial analysis, and the application of regulatory and accounting rules,” GE said.
Over the last 10 years, several companies exited the industry as claims spiked from policyholders activating their benefits. It left just a handful of companies to manage the increasing cost of claims.
Some examples of major companies, which stopped selling individual long-term care, include Allianz Life Insurance Company (ALIZF), Lincoln Benefit Life and State Life Insurance (which is now a part of OneAmerica).
The problem boils down to undervaluing policies when they were being sold in the 1980s and 1990s, because people are living longer and using the benefits for longer than estimated more than 20 years ago.
In the 1990s, the average life expectancy was in the low to mid 70s. But today, that number is nearing 79 years of age for the average American. Policy makers generally assumed at least 30 years would pass before they’d be used, and had to account for pricing.
But as claims started mounting between 2005 to 2010, the companies realized their exposure to risk was greater than anticipated and some exited the market. Some of those were reinsured by GE, which had also just spun off some of its business to what is now Genworth. GE is also a reinsurer to Genworth’s policies.
Jay Gelb, insurance equity research analyst at Barclays, said in a note last week that Genworth is seen as one of the worst performing on individual LTC in the industry, and makes up a bulk of GE’s exposure.
As of December 2018, Genworth faces a cumulative $3.6 billion loss on legacy policies, and it anticipates future losses in the next several years. The company is in the final stages of being acquired by China Oceanwide Holdings, a private Chinese investment firm.
Genworth, along with others in the industry, have had to increase premiums, which will be used to pay for future claims.
One individual LTC insurance company spokesperson, speaking on background, said regulatory oversight earlier could have helped avoid the current struggle. If regulators had periodically reviewed pricing, it could have controlled price increases, the person said.
Hitting rock bottom
The National Association of Insurance Commissioners trade group has been following the issue for at least a decade, and recently launched a task force to help address the problem.
The organization notes on its website that funding concerns have driven the number of LTC policies down sharply, from 372,000 in 2004 to just under 70,000 in 201.
“Likewise, the number of insurers offering the coverage has diminished from slightly over 100 to about a dozen today,” it added. “Additionally, premium rates for newly issued policies have risen as the remaining writers have refined their pricing.”
The goal is to avoid another Penn Treaty — now the metaphor for the industry hitting rock bottom. In 2017, Penn Treaty and American Network were placed in liquidation by the Pennsylvania court system, after being in court-supervised rehabilitation starting 2009.
Penn Treaty and American Network’s claims are now being paid by an assortment of health insurers through state-based networks, which determines the share of the burden each health insurer will take on based on their size.
In 2017, it was estimated that California health insurers would bear the brunt of Penn Treaty’s failure. This means that state-based insurers are including the obligation of the individual LTC policies in health insurance premiums at-large.
Despite all the efforts to correct the mistakes of the past, the future outlook remains volatile.
“Insurers on a statutory basis continue to maintain outsized exposure to Individual LTC reserves compared with statutory capital, showcasing the sensitivity associated with possible reserving actions,” according to the Fitch report.
Legacy policy writers, the report said, “will exhibit significant capital and earnings volatility, driven by small deviations in claim performance and the current interest rate environment,” which is likely to affect their solvency.
A spokesman at the American Council of Life Insurers said the industry has learned its lesson from the past.
“The industry has gained significant experience with long-term care insurance products and is applying these learnings to the development of newer product offerings to address consumers’ long-term care needs,” the spokesman said.
Meanwhile, the NAIC is working on introducing multi-state standards for rate reviews through its task force, which met for the first time on August 4, with a full report due in Fall 2020.
Back in the spotlight
Last week’s hard-hitting fraud accusation against General Electric was quickly criticized by Wall Street — and the company itself pushed back aggressively.
Yet underlying long-term insurance concerns remain, driven by multiple factors. Fitch Ratings’ director of insurance, Anthony Beato said that “reserve adequacy of the block remains questionable.”
While the approvals of the steep premium increases have been approved, it should not be viewed as a reliable trend, Beato cautioned.
The increases in policy were supposed to result in lapses in policy or downgrades in benefits to ease the burden of claims in the future—but neither has happened on a large scale.
Beato said the companies continue to use aggressive assumptions, like improved health of policyholders, which is hard to predict, and future rate hikes that are not guaranteed to predict their reserve needs.
In addition, many companies hide the significant risk they face from this book of business, in part by including it in other related segments or simply including it in the finances for the whole organization, Beato said.
That will change with the updated accounting standards the Financial Accounting Standards Board released in 2018, set to take effect in 2021.
Anjalee Khemlani is a reporter at Yahoo Finance. Follow her on Twitter: @AnjKhem