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Long term care insurance impacted by low interest rates

By Alain Thériault | January 24 2012 08:21PM

Long term care insurance is less rate-sensitive than universal life products and variable annuities because of its non-guaranteed premiums, but it is not bulletproof, says Kevin Strain, Sun Life’s senior vice president, individual insurance and investments. “Declining long term interest rates impact different products. Among them, universal life and variable annuities are the most impacted. But any long term product will be affected,” Mr. Strain points out.

Munich Re, the main reinsurer of long term care products in Canada, agrees. Designed for a long term horizon, the product is sensitive to interest-rate fluctuations, says marketing, vice president Hélène Michaud. “The Canadian market must adopt a long term view to ensure that the product is sufficiently viable to let companies pay future claims. On top of that, new accounting standards (IFRS) that will soon take effect will also affect insurance products.”

Product pricing
However, Munich Re does not foresee sharp increases in long term care insurance pricing, similar to those seen in the universal life market. The product pricing can be adjusted to different assumptions, Ms. Michaud says. Though it is essential to ensure that reserves are sufficient, she does not think an insurer or reinsurer will adjust the rates unless it is essential for the product’s viability.

RGA Canada, which wants to make inroads in the Canadian market, notes that low interest rates are affecting the pricing of this product in the reinsurer’s American operations.

“Even if the product premiums are not guaranteed, we cannot set them today and plan to increase them later. We have to price the risk according to current conditions. For a product already in force, we cannot afford an unjustified increase. This would send clients that bought the product the wrong message,” explains Micheline Dionne, senior vice-president and chief actuary at RGA. This is especially the case in Canada, where long term care insurance sales have barely taken off, she adds.

What would be just cause for a premium increase?

Negative experience, Ms. Dionne says. Presently, though, there is little claims experience to evaluate because sales are so low.

At Desjardins Financial Security, health products manager, Nathalie Tremblay, says that low long term interest rates are the worst threat to the profitability of long term care insurance. Insurers cannot increase the long term care premium like they did for level cost insurance, she adds.

“Unlike whole life products, long term care insurance premiums are not guaranteed. But I can’t see the day when an insurer will dare hike the premiums. This would create another stumbling block for advisors when they try to sell this product to clients,” Ms. Tremblay says.

Claudine Cloutier, living benefits director at managing general agency Groupe Cloutier, thinks the Canadian product is better priced than its American counterpart. She is not overly worried about high premium increases like those of permanent life insurance products. “In the United States, insurers raised the premiums and others got out of the long term care market because they had priced risk poorly. Canadian suppliers decided not to make the same mistake,” she explains.

Sinking back to the depths
After a tumultuous 2009, long term care insurance sales in the US returned to their pre-crisis levels. In Canada, they have always been modest. “After a significant decline in the USA, sales are not back to the level they were earlier in the decade,” says Catherine Theroux, assistant director, public relations at LIMRA.

She mentions the multiple hurdles that have hampered sales growth in this sector. For one, “Consumers don’t want to think about the possibility of being in need of long term care,” she says.

Ms. Theroux also thinks clients don’t understand this product. On top of that, “It’s already challenging for people to make ends meet. Now, they have to consider buying a product with no guarantee you’ll ever need it.” Hence a trend that is emerging in the United States and that should spread to Canada: consumer interest in combined (hybrid) products, she continues. Information on long term sales in Canada is trickling in. After publishing a study on the 2008 results, LIMRA stopped systematically measuring trends in this market in Canada.

This study, involving seven suppliers accounting for more than 90% of the market, evaluated the size of the market at 105,000 insured and $90 million in premiums. This total amounts to 69,000 policies and $80 million in individual insurance premiums. Two-thirds of new sales were generated by the career network and 92% of policies were sold to clients under age 65. The study participants were Sun Life Financial, RBC insurance, Manulife Financial, Desjardins Financial Security, La Capitale, and Knights of Columbus.

LIMRA also conducted an opinion survey of its members, 48 of which are Canadian. These members include almost all the insurers, banks, mutual fund companies, consultants and even one reinsurer, RGA Canada.

Concern over profitability
Asked about the state of the long term care market, the Canadian LIMRA members expressed concern about product profitability. “The product has a long tail so carriers don’t see profit for some time. LTCI is a very capital intensive product up front. This is troublesome given their concerns about profitability,” Jen Douglas, associate research director, LIMRA long term care research explains.

“U.S. LTCI carriers invested too heavily in the pure potential of demographics, which have yet to translate into consumer demand for LTCI in the U.S. I imagine this would be an even greater challenge in Canada (because of universal health care) and worsened by the state of the economy,” Ms. Douglas continues.

Even so, slightly more than half the respondents to the LIMRA survey (including Canadian members) think that the product sales will grow at least moderately in the next three years. Ms. Douglas points out, however, that Canadian growth will be difficult to interpret because of the market’s small base.

Ms. Cloutier is more optimistic about product sales. She sees a bright future in Canada. “This product is not our cash cow for now, but with the state of our health system, it will be getting a lot of free publicity,” she says, referring to wait times in hospitals and long term care centers. For now, sales of long term care are mostly sporadic. No advisors are dedicated exclusively to this market.

She stresses that it will take more than advisors to invigorate LTC sales. Insurers must systematically market the product with targeted ads on TV and radio. News on the healthcare system will do the rest, she says. “When clients hear about a product from someone other than their advisor, this boosts awareness,” Ms. Cloutier says.

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