The Demise of Long Term Care Insurance – It Started in 2002

The 2016 Long Term Care Implosion

A pair of small Pennsylvania insurers focused on long-term care could soon become one of the nation’s costliest insurance failures ever, highlighting the widespread problems that have plagued the industry niche for more than a decade.

Two insurance units of Penn Treaty American Corp., which have combined assets of about $600 million and projected long-term-care claims liabilities topping $4 billion were liquidated in 2016.

The liquidation turned out to the be 2nd largest life-health insurance insolvency in the history of the United States.

From the 1990s through 2002, insurers banked on supplying a growing demand of long term care insurance. Insurers entered a niche with little historical data but they felt that their actuaries and accountants had it under control – NOT.

Medicaid program does pay for nursing homes but is available only for people under the poverty line.

Turns out, most actuaries grossly underestimated costs, and the insurers then met resistance in many state insurance departments when trying to push the pricing miscalculation onto policyholders through steep rate increases – SUCCESSFULLY IN SOME CASES.

Some states did allow double-digit-percentage increases, distressing the often-elderly policyholders. Sales started the downward trend towards collapse amid turmoil, lawsuits and consumer outrage.

The Posterchild for Insurance Disaster

“Penn Treaty is the poster child for what happens if everything goes wrong—when key assumptions on…claims, morbidity, and interest rates go in the wrong direction.”, said Gary Hughes in 2016, general counsel for the trade group American Council of Life Insurers.

“The whole bottom fell out of my life,” Michelle Leonard, 64 years old, a former college professor and administrator in Florida now out on disability, said of Penn Treaty’s downward spiral. She anticipates filing a claim in the future and could receive the benefits she has counted on, but a lack of certainty is causing anxiety.

During the launch of long-term-care, insurers’ actuaries were tasked with developing a model using assumptions for claims, morbidity and interest rates for their investments of premiums (which is HIGHLY regulated).

Bad became worse after the 2008 financial crisis when interest rates plummeted to ZERO! Insurance companies were stuck with liabilities and no way for their assets to keep up with the growing liabilities.

In yet another not smart assumption, many actuaries and insurers assumed a 5% annual lapse rate on their policies, which turns out that number was closer to 1% – OOPSIE. Once again, creating an assumption based upon NO data to substantiate those very same assumptions.

Lessons Learned and Path Forward

The industry has stabilized since this 2016 event, which actually began in 2009. The overall downward trend for long term care insurers is still trending down and will at some point reach an equilibrium.

What you can take away from this story is that “stand-alone long term care” is a risky deal for both the consumer and the insurer. In 2019, there is enough data to now substantiate assumptions and actuarial tables, but unfortunately, the data says that the cost of insurance is WAY higher than originally planned back in the 1990s.

There will likely be a permanent need for long term care insurance for certain segments of people, but the life and annuity industry is picking up a lot of the slack recently with new solutions to fill this gap (i.e. Hybrid LTC Life policies, LTC and Life Combos and life riders).

Stand-alone long term care is now a product of last resort for people, before purchasing a stand-alone policy, look into your options before making a commitment, and there are plenty of options!