Getting the Hybrids on the Road
By Tony Laudato, Vice President, Partnership Solutions Hannover Re
The continued decline of standalone long-term care policies seems inevitable, and the life insurance gap among Americans continues to widen. Hybrid policies offer an obvious solution, and are becoming increasingly popular – but the right approach will be needed for insurers to fully cast off their skepticism
Recent months have seen a steady drip of bad news from life insurers, as firms have had to boost their reserves to the tune of billions in an expectation of soaring payouts for long-term care policies. October’s update from Unum followed to tune of Prudential’s in August, and by the time this is published more will likely have followed.
While troubling, the news simply confirms something that sums have made fairly obvious for some time: the old long-term care market – once so popular as a means of funding assisting living, nursing home and home care services – is now more of a headache than an opportunity for insurers.
The market is now having to significantly review assumptions made long ago when the first such policies were written, during a period when interest rates and projected lapse rates were higher and health care expenses lower. The to say the equation has shifted would be an understatement – healthcare costs for assisting living have almost doubled over the last fifteen years, while one in two Americans now suffers from chronic illness.
The accompanying increased premiums have decimated the industry. Many providers have withdrawn from the line altogether, and those that remain are having to be increasingly restrictive with their policies.
Axing an entire revenue stream, however – especially one that was once so lucrative – is a risky choice to make in a situation where demand is clearly not the problem. The need for long term care is going nowhere.
As such, the market is increasingly starting to turn to hybrid policies. Hybrid policies work by combining the two types of coverage – life insurance and long-term care – and allow for payouts based on accelerated or early payments of a death benefit. Importantly, the combination also allows insurers to stabilise the risk profile of the product, and provide a sustainable means of growing both the top and bottom line.
These policies are designed to make long-term health care insurance profitable again, and in doing they may also present a way to partially tackle another problem—the decline in the life insurance market. The number of Americans holding life insurance has been falling steadily for decades and is now at a record low, with about half of US households now going without. While this problem is concentrated among younger Americans – not the traditional market for late life health care – research shows that one of the main reasons younger Americans don’t buy life insurance is a lack of flexibility and innovation in the product itself. Long term care is much cheaper the younger you are, and so the hybrid policies could well have more appeal here.
The younger market aside, there is every sign that these policies could grow very popular among middle aged and older Americans. As opposed to more traditional stand-alone policies, hybrid policies provide an option that isn’t ‘use it or lose it’ with regard to benefits—with hybrids there is still a death benefit even if the LTC benefit isn’t used. For wealthier clients that have accumulated financial assets throughout their life, hybrid policies additionally provide a way for them to protect those assets from the high cost of late-life care should it be needed.
The current gap in the long term care market is more circumstantial than reflecting anything fundamental—the financial crash and its aftermath engendered a lack of product innovation, with the long-term health care insurance market suffering from this as providers scrambled to de-risk their portfolios. Hybrid solutions, however, offer a solution to this impasse that comes with a far more favourable risk profile, will genuinely benefit all parties involved, and could help breathe life back into the ailing sector.
As well as potentially re-opening the long-term care market, the policies could simultaneously help the market reverse the downward trend in life insurance. Evidence suggests that one of the main barriers for uptake of life insurance among today’s customers is the lack of flexibility and control associated with traditional products. By addressing this, hybrid policies promise to turn two problems into a new and untapped market for the sector.
As a result of all these favourable factors, hybrid policies are on the up, with over 260,000 such policies sold last year. However there is still a long way to – uptake has been delayed and stymied by an understandable scepticism on the part of the industry, still reeling from the impact of the earlier miscalculations and erroneous assumptions that continue to cause losses today. While firms are beginning to warm to the opportunities afforded by the new approach, skepticism still lingers.
If the long-term care market is to enjoy a hybrid revival and avoid the mistakes of history, carriers will need to ensure that the design of such products is right, and certainly more robust and well-founded than those of the previous era of stand-alone life insurance products. As the history of the aviation industry teaches us, hyper-engineering is the best form of reassurance. Given the nascent stage the new product is at, getting it right requires a specific set of underwriting skills, a granular understanding of the pricing and risk modelling involved, a deep expertise in area of mortality rates, and new reinsurance structures to support risk transfer. For those that can get it right, the rewards will be significant.
Tony Laudato, FSA, MAAA, is Vice President of Partnership Solutions with the Hannover Re Group. He joined the Hannover Re Group in July 2012 and is currently leading the Partnership Solutions Group that supports insurance carriers’ products, web, mobile and digital strategies that are focused on the demands of today’s consumers and reaching new markets. In addition to working with carriers, the specialized team works with emerging, high tech distribution companies and InsurTech players, vetting their technology and helping them gain access to insurers that want to modernize the life insurance sales process, products, risk assessment, client engagement and back-end analytics.
