Long-Term Care Insurers: Knowing More Than Your ‘Opponent’

I’ve said this before, but it bears repeating: be careful in any transaction where the other parties know the deal better than you do.  In most insurance transactions, the company knows more about the transaction than the individuals or firms seeking coverage.  There are exceptions, though, when the model for policyholder claims behavior is not well-understood.  This exists in life and annuity coverages in small ways, and in health, disability, and long-term care coverages in greater ways.

Long-Term Care Insurers: Knowing More Than Your 'Opponent'

The main advantage that a potential life/disability/health insurance buyer has is that he knows the details of his health far better than the insurer does.  Underwriting standards vary across companies, and not all companies are as thorough at checking the health of the insured as the others do.

With life and annuity coverages, outside of life settlements, this risk to the insurance companies is small, because the actuaries expect the potential losses from the hidden knowledge of the insureds, and build it into pricing.  Death is a tough way to make money, and those using it to make money off insurers must pay a heavy price to do so.  When death stares you in the face, it seems kind of callous to say, “How can I make money off this for my heirs?”  Most people realize that there is something more serious going on than making money, when death is near.

But when we deal with health matters, things get more murky, particularly the older we get.  Again, insurers will attempt to determine those that have the greater probability of making significant claims, but the ability to do so is more limited, because people know when they are not well beyond when they have sought medical help in the past.

(This is one reason why Obamacare (PPACA) will end up increasing costs for most healthy people.  By attempting to cover everyone, and limiting the ratio of premiums from the sick to the healthy to a factor of three, those who are healthy will pay a lot more, or find some clever way to drop out.)

As an aside, before the modern health insurers found their footing around 1988, cumulative profits for the industry as a whole was negative.  Since then, they got better at discriminating on what groups/individuals they would cover, and those they would not.

But with long-term care insurance, the insurance industry has not made money to date. Why?  Insurers have consistently underestimated the willingness of people to file claims on their policies.  There is no incentive not to do so, unlike death.

Thus the insurers have been in a battle involving raising premiums on new and old business, with healthier business leaving.  The model doesn’t work, I don’t care what the largest writer Genworth Financial Inc (NYSE:GNW) thinks, when the article says:

Genworth Financial Inc., with about a 33% market share of long-term-care policies sold to individuals, said in May that it is seeking premium increases averaging more than 50% to stave off more losses in its oldest policies.

Genworth also halted sales June 1 through AARP, the older-Americans’ group with a huge pool of potential customers.

“We’ve learned a lot over the last 30 years, and we now believe we have a better ability and more knowledge” to issue policies that “provide significant financial protection to Genworth,” Genworth Chief Executive Thomas McInerney said in an interview.

The insurer started requiring blood tests and other medical screening, which the industry generally hadn’t done before. And it is charging women who apply individually more than men for the first time because women tend to live longer and require more years of care.

That brings me to this summary: don’t own companies that are deep into long term care, like Genworth.  Think of Penn Treaty, and other companies that went bankrupt as a result of long term care.  Long-term care  is not insurable; those insured have too much control over when they make claims.

As for those with long-term care policies, if they are old, keep paying on them, you will likely do well on them when you finally need to draw on the policies.  You have benefits that benefits that can no longer be purchased.  Enjoy the exclusive club you are in.

By David Merkel, CFA of Aleph Blog