The State of Long-Term Care Insurance: The Market, Challenges and Future Innovations Eric C. Nordman Director CIPR Contributions By John Ameriks Dimitris Karapiperis Vincent Bodnar LaRhae Knatterud Joseph Briggs Kevin M. McCarty Bonnie Burns Tom McInerney Laura N. Cali Teresa D. Miller Andrew Caplin Tanji Northrup Marc A. Cohen Dan Schwartzer John Cutler Mathew D. Shapiro James M. Glickman Jesse Slome Robert L. Kane Christopher Tonetti Eric King May 2016 CIPR Study The State of Long-Term Care Insurance The Market, Its Challenges and Future Innovations Prologue By Eric C. Nordman, CPCU, CIE Director, CIPR This CIPR study presents independent research the purpose of which is to inform and disseminate ideas to regulators, consumers, academics and financial services professionals. CIPR studies are available at no cost on the CIPR website: http://www.naic.org/cipr_special_reports.htm. This study would not have been possible without the contributions of several key regulators and other notable authors from the academic community, consumer interests and the insurance industry. They are listed on page ii. I would also like to thank CIPR Research Analyst Dimitris Karapiperis for his diligence in identifying authors, working with them on their submissions and working with me to deliver a cohesive report contributing to our collective knowledge on long-term care issues. Disclaimer: This study represents the opinions of the author(s) and is the product of professional research. It is not intended to represent the position or opinions of the NAIC or its members, nor is it the official position of any staff members. Any errors are the responsibility of the author(s). Acknowledgements: The authors are grateful to those who reviewed and contributed to the study and helped improve it with their insightful comments. Special thanks to Andy Beal, NAIC COO and CLO, Shanique Hall, CIPR manager for their valued comments and edits and Pamela Simpson of Regulatory Services for her invaluable editorial help. CIPR Study Series 2016-1 Date: May 2016 i Authors: John Ameriks, Principal, Vanguard Vincent Bodnar, Chief Actuary, LTCG: [email protected] Joseph Briggs, Ph.D. Candidate, New York University: [email protected] Bonnie Burns, Policy Specialist Consultant, California Health Advocates: [email protected] Laura N. Cali, Commissioner, Division of Financial Regulation: [email protected] Andrew Caplin, Professor of Economics, New York University; National Bureau of Economic Research (NBER): [email protected] Marc A. Cohen, Chief Research and Development Officer, LifePlans, Inc.: [email protected] John Cutler, Senior Fellow, National Academy of Social Insurance: [email protected] James M. Glickman, President and CEO, LifeCare Assurance Company: [email protected] Robert L. Kane, Professor, University of Minnesota School of Public Health: [email protected] Dimitris Karapiperis, Analyst, NAIC Center for Insurance and Policy Research: [email protected] Eric King, Health Actuary, NAIC: [email protected] LaRhae Grindal Knatterud, Director of Aging Transformation, Minnesota Department of Human Services: [email protected] Kevin M. McCarty, Commissioner, Florida Office of Insurance Regulation: [email protected] Tom McInerney, President and CEO, Genworth Financial, Inc. Teresa D. Miller, Commissioner, Pennsylvania Insurance Department: [email protected] Tanji Northrup, Asst. Commissioner, Utah Insurance Department: [email protected] Dan Schwartzer, Dep. Commissioner, Wisconsin Office of the Commissioner: [email protected] Mathew D. Shapiro, Professor of Economics, University of Michigan; NBER: [email protected] Jesse Slome, Executive Director, American Association for Long-Term Care Insurance: [email protected] Christopher Tonetti, Assistant Professor of Economics, Stanford GSB; NBER ii Contents Forward…………………………………………………………………………………………………………………………………………….......….1 The State of the Long-Term Care Insurance Market…………………………………………………....................................6 Introduction……………………………………………………………………………………………………………………………………...7 Market Size…………………………………………………………………………………………………………………………………….…7 Insurance Companies in the Market...................................................................................................12 Claims Activity and Performance….....................................................................................................13 Market Sizing Summary......................................................................................................................16 Product Evolution...............................................................................................................................17 Consumer Profiles..............................................................................................................................19 Consumer Experience……………………………………………………………………………………………………………………..22 Insurer Challenges…………………………………………………………………………………………………………………….......25 Section Conclusion………………………………………………………………………………………………………….……..……….27 Economics and Benefits of Private Long-Term Care Insurance………………………………………………………………..30 Introduction…………………………………………………………………………………………………………………………….……..31 Why Insurance?………………………………………………………………………………………………………………..…….........34 The Benefits of Insuring…………………………………………………………………………………………………………………..36 The Benefits of Insurance for Policyholders…………………………………………………………………………………….38 The Benefits of Insurance for Caregivers………………………………………………………………………………….………42 Insurance and Medicaid Expenditures…………………………………………………..………………………………………..43 Section Conclusion………………………………………………………………………………………………………………….........46 The Long-Term Care Insurance Puzzle …………………………………………………………………………………………………….48 Current Financing of Long-Term Care……………………..……………………………….……………………….……….……..49 iii Consumer Attitudes …………………………………………………………………………………………………………..…………..50 Unique Distribution Challenges……………………………………………………………………………………………….………51 Early Distribution Success…………………………………………………………………………………….………………………...51 Early Successes Soon Faced Challenges……………………………………………………………………………………….….52 Estimating Demand for Improved Long-Term Care Insurance…………………………………………………………………56 Introduction………………………………………………………………………………………………………………………….………..57 Background………………………………………………………………………………………………………………………………….….60 Model-Implied Demand………………………………………………………………………………………………………….……….66 Stated Demand……………………………………………………………………………………………………………………………....67 Section Conclusion……………………………………………………………………………………………………….…………………69 Insurer In-Force Long-Term Care Management……………………………………………………………………….………………70 Basics of Long-Term Care Insurance Financial Mechanics…….………………………………………………….………71 Unforeseen Developments and Trends……………………………………………………………………………………………73 Corrective Actions……………………………………………………………………………………………………………………..…..74 Nontraditional Funding for LTC…………………………………..…………………………………………………………………..75 Underwriting and Private Long-Term Care Insurance Options………………………………………………………...78 Underwriting Point-of-Care and Point-of-Need Funding Solutions…………………………………………….......79 Financing Options for Long-Term Care…………………………………………………………………………………………………….82 Introduction…………………………………………………………………………………………………………………………………….83 Who Would Benefit Most from Long-Term Care Insurance…………………………………………………………..…84 How Could the Basic Design of Long-Term Care Insurance Change to Meet Greater Needs…………….84 Next Steps…………………………………………………………………………………………………………………………….…………91 Long-Term Care Reform Proposals………………………………………………………………………………………………………….94 iv Introduction………………………………………………………………………………………………………………………….………..95 The States……………………………………………………………………………………………………………………………….………97 Other Major Players……………………………………………………………………………………………….……………………..102 Other Interesting Proposals……………………………………………………………………………………………………….….111 Section Conclusion………………………………………….…………………………………………………………………………….113 Minnesota Efforts to Develop Long-Term Care Financing Options for Middle Income Households……….114 Introduction………………………………………………………………………………………………………………………….……...115 Own Your Future…………………………………………………………………………………………………………….…………….115 The Current Long-Term Care Financing Marketplace…………………………………………………….………………117 The Work of the Subgroup on Product Availability……………………………………………………………………..…119 Overarching Recommendations………………………………………………………………………………………………….…122 Section Conclusion………………………………………………………………………………………………………………………..126 Regulation of Long-Term Care Insurance Rates……………………………………………………………………………………..128 Introduction………………………………………………………………………………………………………………………….……...129 Long-Term Care Insurance Rating Regulations and Related Resources………………………………………….129 Rating Model #641—Pre-Rate Stabilized and Amended Versions…………………………………………….……129 NAIC Guidance Manual for Rating Aspects of the LTCI Model Regulation………………………………………134 Model Bulletin…………………………………………………………………………………………………….…………………………135 A Consumer Advocate’s View on Financing Long-Term Care: A Tsunami of Another Kind……………………..136 Introduction………………………………………………………………………………………………………………………….……....137 The Need for Long-Term Care Insurance and Available Options………………………………………………….…137 Areas of Future Concerns……………………………………………………………………………………………………………...138 Section Conclusion…………………………………………………………………………………………………………………….….141 v Insurance Industry Executive Views on Long-Term Care Insurance……………………………………………………….142 Introduction………………………………………………………………………………………………………………………………….143 The Path Forward Runs Through a Competitive and Grow Private Long-Term Care Insurance Industry………………………………………………………………………………………………144