Life Insurance

2 Problems Present a Big Opportunity

The continued decline of standalone long-term care policies seems inevitable, and the life insurance gap among Americans continues to widen. Hybrid policies offer a joint solution that with the best approach can turn these two challenges into a new market.

Recent months have seen a steady drip of bad news from life insurers, as firms have needed to boost their reserves to the tune of billions within an expectation of soaring payouts for long-term care policies. October’s update from Unum followed Prudential’s in August, and by time this really is published more will probably have followed.

While troubling, this news simply confirms something that has been fairly obvious for many time: The old long-term care market – once so popular as a way of funding assistied living, nursing home and home care services – is now more of a headache than an opportunity.

Insurers are now needing to significantly review assumptions made long ago when the first such policies were written, during a period when life expectancies were shorter and health expenses lower. To state the equation has shifted would be an understatement — healthcare costs for assisted living have almost doubled over the final 15 years, while one in two Americans now suffers from chronic illness.

The accompanying increased premiums have decimated the market. Many insurers have withdrawn from the line altogether, and the ones that remain are needing to be increasingly restrictive with their policies.

Axing a whole revenue stream, however — especially one which was once so lucrative — is risky in a situation where demand is clearly not the issue. The need for long-term care is going nowhere. And getting around the front foot with a new approach would be advantageous should a new solution cause an emptying marketplace to fill support.

Hybrid policies are made to make long-term care insurance profitable again, plus they do so by simultaneously offering a new means to fix another difficult problem — the decline within the life insurance market. The number of Americans holding life insurance has fallen steadily for years. The number of Americans holding life insurance has been falling steadily for decades and it is now at a record low, with about half of U.S. households going without.

Hybrid policies work by combining the 2 types of coverage – life insurance and long-term care – and allow for payouts according to accelerated or early payments of the death benefit. Importantly, the combination also allows insurers to stabilize the risk profile of the product and provide a sustainable means of growing both the top and main point here.

Despite some initial skepticism according to previous miscalculations that are now coming home to roost, insurers are starting to warm to the brand new approach, and upward of 260,000 hybrid policies were sold this past year.

As well as potentially re-opening the long-term care market, the policies could simultaneously help insurers reverse the downward trend in life insurance. Evidence suggests that one from the main barriers for uptake of life insurance among today's customers may be the lack of flexibility and control associated with traditional products. By addressing this, hybrid policies promise to turn two problems right into a new and untapped market for insurers.

However, the skepticism isn’t without cause. As the headlines are reminding us, the consequences of incorrect assumptions and miscalculation could be drastic and long-lasting. If the long-term care market is to enjoy a hybrid revival and avoid the mistakes of history, carriers will need to ensure that the design is right. Given the nascent stage from the new product, this requires a particular set of underwriting skills, a granular understanding of the pricing and risk modeling involved, a deep expertise in mortality rates and new reinsurance structures to support risk transfer. For those that can get it right, though, the rewards will be significant.

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