Long-term Care Insurance:

A Product and Industry in Transition

Presented to

NAIC Senior Issues Task Force

by

Marc A. Cohen, Ph.D.

LifePlans, Inc.

Gaylord Convention Center in National Harbor, Maryland

November 28, 2012

Presentation Topics

♦ Current overview of U.S. LTC Insurance Market

♦ Profile of Individuals Purchasing Policies

♦ Product Evolution

♦ Market exit among Carriers and Implications

2

Current LTC Insurance Industry Parameters

♦ Individual market

– Roughly 5-6 million individual policies in force.

– Total annualized in-force premium of over $8 billion.

– Roughly one dozen companies still active in market

– Annual sales in 2010 were 65% lower than in 2000.

– Between 2009 and 2011 average annual growth was positive at 6%

♦ Group Market

– Between 2.2 and 2.6 million certificates in force.

– Total premium of greater than $2.0 billion.

– Compound annual sales growth rate between 2005 and 2010 is +5%

– Slightly more than 11,000 employer groups sponsoring coverage

– Less than 8 insurers actively selling in the group market 3

Number of Insured Lives has been relatively flat since 2005

4

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

1,704

3,338

3,697

3,202

2,601

2,946

4,130

4,793 4,497

5,179

5,612

6,053

6,404

6,995 6,894

7,030 7,115 7,157 7,263

Th

ou

san

ds

Year

Source: NAIC, 2011

Annual Sales of Individual LTC Insurance

Policies have been declining since 2002

380

500

420

609 600

698

754

509

362 332

300 306 283

220 253 247

0

200

400

600

800

1990 1992 1994 1996 1998 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Note: LifePlans analysis based on AHIP, LIMRA and LifePlans sales surveys, 2011.

5

Growing proportion of sales is in the Group Market

♦ Group market represents a growing share of sales:

– In 2000: 75% Individual market 25% Group Market

– In 2010: 58% Individual market 42% Group Market

♦ Concentration in both markets: Top 10 carriers in individual market and top 5 in group market: 95% of sales

♦ Market penetration less than 10% of total population

– 16% of the age 65+ with incomes > $20,000 have policies.

6

CHARACTERISTICS OF

PRODUCTS AND PURCHASERS

7

Great deal of product change over last 20 years

♦ Began as nursing home insurance in 1980s but now reimburses

the costs of care in community and institutional settings:

• Nursing home

• Assisted Living

• Home and community-based care

♦ Access to a bank of benefits – Typically to reimburse the costs of services

– Standard benefit triggers based on functional and cognitive status

♦ Care management provided to help at claim time.

♦ Average premiums differ by market:

– Individual Market: about $189 per month (average age 59)

– Group Market: about $ 57 per month (average age 46)

8

Policies are becoming more comprehensive, greater

benefits, and average premiums are increasing

Policy Characteristics Average

for 2010

Average

for 2005

Average for

2000

Average

for 1995

Average for

1990

Policy Type

Nursing Home Only

Nursing Home & Home Care

Home Care Only

2%

92%

6%

3%

90%

7%

14%

77%

9%

33%

61%

6%

63%

37%

---

Daily Benefit Amount for NH

Care

$154 $142 $109 $85 $72

Daily Benefit Amount for Home

Care

$153 $135 $106 $78 $36

Nursing Home Only Elimination

Period

86 days 80 days 65 days 59 days 20 days

Integrated Policy Elimination

Period

89 days 81 days 47 days 46 days --------

Nursing Home Benefit Duration 4.8 years 5.4 years 5.5 years 5.1 years 5.6 years

Percent Choosing Inflation

Protection

92% 76% 41% 33% 40%

Annual Premium $2,268 $1,918 $1,677 $1,505 $1,071

Source: AHIP, 2011 9

Across all ages premiums are rising, but largest

increase is at younger ages

$2,255

$2,759

$3,294

$3,949

$1,877 $2,003

$2,341

$1,213 $1,487

$1,829

$2,581

$919 $1,177

$1,528

$2,146

$0

$1,000

$2,000

$3,000

$4,000

Age 55-64 Age 65 to 69 Age 70 to 74 Age 75+

2010 2005 2000 1995

$2,604

10

Premium Increase: 1995-2010: age 55-64: 145%; age 65-69: 134%; age 70-74: 115%; age 75+: 84%

Source: AHIP, 2011

Younger, wealthier and employed individuals are buying policies

Characteristic 2010 2005 2000 1995 1990

Average Age

%> 70

59 years

8%

61 years

16%

65 years

40%

69 years

49%

68 years

42%

% Married

69%

73%

70%

62%

68%

Median Income

% > $50,000

$87,500

77%

$62,500

71%

$42,500

42%

$30,000

20%

$27,000

21%

Median Assets

% > $75,000

$325,000

82%

$275,000

83%

$225,000

77%

$87,500

49%

N.A.

53%

% College Educated

71%

61%

47%

36%

33%

% Employed

69%

71%

35%

23%

N.A.

11 Source: AHIP, 2011

Most people buy policies to maintain lifestyle and

consumption and not just to protect assets (2010)

18%

33%

13% 18% 17%

0%

10%

20%

30%

40%

Avoid

Dependence

Protect

Assets/Leave

an Estate

Guarantee

Affordability

Protect Living

Standards

One of Other

Reasons

12 Source: AHIP, 2011

Incurred claims are growing more quickly than annualized premium

as the policyholder base ages and sales of new policies decline

13

$4,187

$5,155

$5,910

$6,724

$7,665

$8,260

$8,797

$9,321 $9,727

$10,004 $10,380

$10,615

$1,556 $1,870

$2,388 $2,765

$3,124 $3,380

$3,795 $4,240

$4,724 $5,102

$5,912 $6,350

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

$11,000

$12,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Millio

ns

Year Annualized Earned Premiums ($000) Incurred Claims ($000)

Source: NAIC, 2011

Most claimants are well served by companies when it

comes to claims payments

♦ More than $35 billion paid in claims and now >$4 billion per year

♦ Data suggests that roughly 95% of all claims are paid.

♦ Of people receiving claims payments, 94% had no disagreement with the insurer and 3% had a disagreement that was resolved satisfactorily.

♦ Vast majority of claimants indicate that policy benefits met their care

needs; 90% felt their policy provided flexibility in service choice.

♦ The insurance covers a significant percentage of the daily costs of care -- (between 72% and 98%).

♦ Half of claimants felt that in the absence of their policy, they would have to seek institutional care or would not be able to afford service levels.

♦ Most people have no disagreement with their company at claim time (94%), and the majority (77%) of do not find it difficult to file a claim (77%) .

14 Source: U.S. Department of Health and Human Services, 2010

RECENT TRENDS:

SIGNIFICANT MARKET EXIT

AMONG MAJOR CARRIERS

15

Study of Market Exit ♦ Purpose

• To understand what are the primary reasons why companies who actively marketed LTC insurance policies ceased selling such policies

• How has the industry changed over the last 15 to 20 years in terms of key aggregate market characteristics and performance indicators

♦ Method

• Date from the National Association of Insurance Commissioners (NAIC) Long-Term

Care Experience Reports for 2000, 2009 and 2010

Sizing the market Key industry performance variables

• Development and administration of a survey to key executives in 26 companies

♦ Support

• Funded in part by the Assistant Secretary of Planning and Evaluation Office of Aging, Disability and Long-Term Care, Department of Health and Human Services

• In-kind support from the Society of Actuaries

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Roughly a dozen companies are still selling a meaningful numbers of policies;

in 2002, AHIP reported 102 companies selling policies

Currently Selling Closed Blocks

Genworth Life Insurance Company/ Genworth Life

Insurance Company of NY

John Hancock (Individual Policies)

Bankers Life & Casualty Company

Transamerica Life Insurance Company

State Farm Mutual Auto Insurance Company

New York Life Insurance Company

Northwestern Long Term Care Insurance Company

Mutual of Omaha Insurance Company

Massachusetts Mutual Life Insurance Company

Medamerica Insurance Company/ Medamerica

Insurance Company of NY

Knights of Columbus

Thrivent Financial For Lutherans

Unum Life Insurance Company of America

First Unum Life Insurance Company

Metropolitan Life Insurance Company

John Hancock Group

Metlife Insurance Company of CT

Continental Casualty Company

Prudential Insurance Company of America

RiverSource Life Insurance Company

Allianz Life Insurance Company of North America

Senior Health Insurance Company of PA

Penn Treaty

Aetna Life Insurance Company

Lincoln Benefit Life Company

Union Security Insurance Company

Time Insurance Company

Ability Insurance Company

United Teacher Assoc Insurance Company

American Family Life Assurance Company of Colorado

Monumental Life Insurance Company

Kanawha Insurance Company

CUNA Mutual Insurance Society

Physicians Mutual Insurance Company

Provident Life & Accident Insurance Company

WEA Insurance Corp

Guarantee Trust Life Insurance Company

Southern Farm Bureau Life Insurance Company WEA

Insurance group is still marketing a small number of

Partnership policies.

17

The inability to hit profit objectives, concern about rate relief and

high capital requirements have driven companies from the market

18

Selected Reasons Percent Responses

Product performance - not hitting profit objectives 69% 18

Concern about ability to get rate increases if necessary 62% 16

Capital requirements

54%

14

Reputation risk

23%

6

Distribution issues

23%

6

New regulatory requirements

19%

5

Unfavorable public policy

4%

1

Note: Table does not include all reasons given.

Single most Important Reason that the Company left the

Market: Capital Requirements

19

19%

12%

12%

4% 4% 8%

4%

23%

15%

Product performance - not hittingprofit objects

New senior management notinterested in product

New evaluation/assessment ofthe risk involved with the productand staying in the marketDistribution issues

Lack of confidence in ability tomanage risk

Could not get reinsurance orpartner with whom to share risk

Concern about ability to get rateincreases if necessary

Capital requirements

Other

Recent performance in the market also deteriorated somewhat:

In four of the last six years the actual-to-expected loss

experience has been over 100%

20

100%

105% 104%

103%

97%

95% 95% 94% 94%

93%

95%

99%

104%

102%

99%

101% 100%

103%

80%

85%

90%

95%

100%

105%

110%

115%

120%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Per

cen

tag

e

Year

Individual Year Cumulative Countrywide Experience Actual Losses to Expected Losses

Performance of companies who have exited and have

closed blocks is less favorable than those still in market

21

45%

81%

29%

68%

55%

92%

33%

81%

0%

25%

50%

75%

100%

% of TotalPolicyholders

Actual-to-expectedIncurred Claims

(cumulative)

Standard Deviation inActual-to-Expected

(cumulative)

Coefficient ofVariation in Claimsper Covered Life

In-market Closed Block

Source: LifePlans Analysis of NAIC Experience Reports, 2011

Most companies indicate they are very

unlikely to return to the market

22

8%

12%

4%

40%

36%

High (>75% chance)

Medium (50%-74%)

Low (25% to 49%)

Very low (<25%)

Not going to happen

Circumstances under which Company

would consider re-entering Market

23

36%

14%

46%

32% 32%

46%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Regulatorychanges

Changes todistribution

Changes tothe structure

of the product

Changes inconsumerattitudes

Changes inpublic policy(tax policy)

Other

Selected Factors Potentially Influencing the

Decision to Reenter the Market

24

Selected Changes Definitely Maybe No

Ability to file multiple sets of new-business premium rates the use

of which is automatically determined by an external interest-rate

index.

4%

32%

60%

The ability to file multiple sets of new-business premium rates the

use of which is automatically determined by an external interest-

rate index for new-business premium rates and in-force premium

rates.

4%

36%

56%

Allowing stand-alone LTC and/or combination-products to be

funded with pre-tax dollars.

8%

25%

62%

Being able to offer other combination products (for example,

disability income with LTC, or critical illness with LTC rather

than just life and annuity combination products.

4%

28%

68%

Being able to offer a Universal LTC policy design so that like

Universal Life, it would allow for premium flexibility, interest

crediting, cash values, age and/or duration adjusted insurance

charges (current and guaranteed) for LTC, and surrender

charges.

8%

20%

64%

Note: Only listed are those changes that received >25% response of “Maybe” or “Definitely”

Conclusions ♦ By all measures private market is not meeting initial

expectations

♦ Public policy and regulatory approaches should be designed to help the industry “Re-set”:

• Lower the cost of policies, • Allow greater product funding-flexibility, • Support new forms of combination-products, • Encourage strategies that help to minimize risks outside of the control

of companies to “de-risk “to lower capital requirements

♦ Important to provide companies with more certainty around

rate relief regulatory policy

♦ Large number of policyholders in “closed blocks” poses challenges to carriers, consumers and regulators.

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