Clearly, the pricing is at least partly related to the underwriting. The more data the underwriters can crunch, the more appropriate the pricing. Early LTC policies are understood to have been underpriced in part because of inadequate data.
“When LTC insurance was launched in the 1970s, the product was designed, marketed and regulated as a level-premium product, which we know today was a flawed pricing model,” says Julie Westermann, a senior director at Richmond, Va.-based Genworth Financial, a leading supplier of LTC insurance. She says several decades often elapse between the time a long-term-care policy is purchased (typically, when the clients are in their mid-50s to early 60s) and the time policyholders make claims (generally when they are in their 80s).
That means “carriers were expected to predict what would happen to risk drivers during that time, including mortality, morbidity, and lapse and interest rates,” she says. “In fact, those trends were unknowable, and, as a result, carriers suffered billions of dollars of losses.”
Since then, many carriers have exited the industry. Many of the survivors have “had to seek high, double-digit premium increases,” says Westermann, “to ensure that premiums were adequate to pay future claims.”
If DNA data leads to more accurate risk assessment and, therefore, more appropriate underwriting and pricing, that would ultimately be good for the industry and for policyholders. Rates might even stabilize.
Wishful thinking, perhaps. Fortunately, there are other innovations in the offing, too. Some carriers use data mining to draw conclusions about potential policyholders’ health prospects. Those individuals who maintain a gym membership and shop at health food stores, say, are likely to be in better shape than those who frequent fast-food establishments, the reasoning goes.
“That is happening already, and it’s already impacting underwriting and premium rates,” says Chow. “Companies are applying social information from all sorts of third-party sources. People are scored based on their histories and demographics.”
At the same time, there are other innovative ways LTC insurers are trying to improve their underwriting standards. “For the longest time, LTC products have been underwritten based on mortality rather than health,” says Chow. “But now carriers are using more health-type measures. … Mortality, after all, is not a great predictor of the need for LTC services. This was one of the reasons the industry got in trouble before.”
Genworth is working with state regulators to try to implement annual premium adjustments based on claims, similar to the way policies on homeowners and auto and health policies make pricing decisions. “This is completely opposite of the way long-term-care insurance policies historically have been regulated, where carriers had to wait so long for actuarially justified increases that they incurred large losses and were forced to raise premiums by double, even triple digits,” says Westermann.
She is optimistic. “When this new framework is enacted, it can spur a stronger and more attractive private sector solution to helping Americans address the financial challenges of aging, which is especially important as government programs are increasingly facing budget cuts,” she says.