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Learning From Past Experience: The Long Term Care Dilemma

The long-term care insurance (“LTCi”) market has grown significantly since the first LTCi policies were marketed over 30 years ago. In those days Americans were spending less than $20 billion on long-term care (“LTC”). Today, Americans are spending roughly $225 billion on LTC and that number is expected to grow as baby boomers reach retirement age. In the past decade alone, the market for LTCi has grown from insuring roughly two and a half million lives to now covering more than seven million lives.

As illustrated in a recent study, The State of Long-Term Care Insurance: The Market, Challenges, and Future Innovations (the “Study”) conducted by the National Association of Insurance Commissioners (“NAIC”) Center for Insurance Policy and Research, there are two key social factors driving the development of LTCi—mortality risk and longevity risk. Improvements in the overall health and mortality rates of the population means that people are living longer and will need to secure resources to cover the cost of LTC for longer periods of time. Many have turned to LTCi, but some unique characteristics of LTCi have made it difficult for carriers to apply accurate rate assumptions when pricing the product. As is explained in greater detail below, state insurance laws generally require that LTCi policies may only be cancelled for non-payment of premium. In addition, products are often designed for premium stability during the life of the policyholder, and policies generally cover the actual cost of care up to a daily maximum. Lastly, where carriers’ original pricing assumptions are negated by actual experience, carriers may only adjust premiums after obtaining regulatory approval. Collectively, these factors impair carriers’ ability to respond to drastic changes in current and future demand for LTCi.

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