| Long term care insurance = Siudi Insurance = ביטוח סיעודי |
| For decades, GE was regarded as a highly successful conglomerate with a wide range of profitable businesses, however since the financial crisis of 2008 its fortunes have turned and the company has had many setbacks. The most recent was in August, when the publication of a “whistle blower” report (1) argued that GE’s long-term care insurance reserves are woefully underfunded by $29bn. Long-term care(“LTC”) insurers collect premiums from policyholders protecting against the spiraling cost of nursing home or home care, and in return promise to pay these claims at a date long into the future. In effect, GE collected premiums over their lifetime, reported them as profits, but failed to build reserves sufficient to meet the future claims from these policies. The ability of GE to meet its obligations to these policy holders is now being questioned as the future liability is immense. Changes in mortality and life expectancy, Alzheimer’s and lower incidence of lapse – that is policy holders cancelling their policies – have impacted GE and other LTC insurers’ financial health. Interestingly, according to US experience, the trends of geographic distances between family members and proportion of women in the workforce has negatively impacted the availability of informal, family-based support, thereby increasing the need for formal LTC (2). In sum, the risks of these LTC policies are much greater than originally thought and in many cases have bankrupted otherwise successful insurance companies. Another integral part of actuarial assumption for long-term care policies is interest rates. Over the past year, interest rates have plummeted globally, and the effect of this on insurance company reserves needs attention. Lower interest rates are damaging for insurance companies as the LTC reserves earn less interest. The interest rate assumptions built into the calculation of premium and future returns on reserves can trigger a need for significant increase in reserves for LTC policies as in the case of GE. According to industry data, approximately 86% of GE’s LTC claims are ahead of them and the accompanying losses are growing at an exponential and un-survivable rate. But also lower interest rates should trigger an increase in premiums. With this preamble, in Israel with its young, growing population and increasing life expectancy, long-term-care nursing policies offering coverage for life with fixed premiums are surprisingly still being marketed. Israeli insurance companies are highly regulated, and there are reserves for future claims, such that current policyholders need not be overly concerned. However the future ability to take out LTC insurance should not be taken for granted. In Israel, at present these policies are widely marketed, but at some point, “for life” with “fixed premium” LTC policies might be a thing of the past. In fact, one insurer has already started to “cap” their payout after year 5. Interest rates in Israel have dropped sharply, while headline inflation numbers are low despite the growing economy meaning that Israeli insurer reserves will also be challenged to invest the premiums collected. Further, in Israel the regulator has introduced new rules that will result in insurers paying out more claims by changing the medical evaluation procedures. In short, in Israel private LTC insurance fixed premiums will most likely continue to go higher and at some point the industry might switch to variable rate policies to protect themselves and current policy holders. For clarification, Kupat Holim LTC insurance policy premiums are not fixed, and are expected to rise by 80% over the next decade according to industry estimates (3). Therefore, the take-away is to buy a long-term care insurance policy with fixed premiums from a financially strong and stable company. The company must have assets in the billions; a proven track record in underwriting long-term care insurance; consistently high financial ratings from the leading rating agencies. Aside from the financial strength, the residual policy values should be examined relative to premiums as well as the firm’s record for paying claims and customer service. The premiums paid should be viewed as a savings plan and less as an insurance, whereby you are pre-paying for a future expense in installments. For this, professional advice and service is needed and we are more than happy to assist. References (1) “General Electric, A Bigger Fraud than Enron” Harry Markopolis (2) “An Overview of the U.S. LTC Insurance Market (Past and Present):The Economic Need for LTC Insurance, the History of LTC Regulation & Taxation and the Development of LTC Product Design Features” (3) “Lower rejected LTC claims, higher premiums” The Marker 24/12/18 |
