Claims in the long-term care (LTC) insurance segment skyrocketed 20% in 2022, creating a difficult combination with inadequate pricing assumptions on older blocks of business that have forced significant reserve increases, according to a recent AM Best report.
Rising interest rates have provided some relief to the companies underwriting this high-risk product, given the potential boost to investment yields. However, the market challenges for this segment will persist despite the improved interest rate environment, according to the Best’s Market Segment Report, “Long-Term Care Claims Skyrocket in 2022.”
LTC claims in 2022 grew at a rate that outpaced historical levels—following two years of lower-than-normal utilization—further pressuring the insurers writing this business. The LTC segment performed well during the COVID-19 pandemic, as claims declined 13% in 2020. However, these claims increased 20% in 2022 to $13.1 billion, from $10.9 billion in 2019, according to the report. The sharp rise heavily outweighs the $11.5 billion of earned premiums reported in 2022.
“The unknowns of how long policyholders will retain their policies, the cost of claims, and the duration of benefits are challenges for insurers, especially with policies offering lifetime benefits or inflation riders,” said Michael Adams, associate director, AM Best.
Driving the uptick in claims is the shift from home care to long-term care facilities, causing an increase in the dollar amount of claims, as the cost of health care continues to rise. Home care was more common during the pandemic because families were reluctant to admit loved ones to long-term care facilities, many of which were barely coping with the rapid spread of the virus among staff and residents.
“The cost of claims rose as staffing shortages pushed salary and wage costs higher for care providers, while inflation pushed up the cost of supplies,” said Kaitlin Piasecki, industry research analyst, AM Best. “Since 2016, claims paid on individual policies have exceeded premiums, and when reserve increases are included, total loss ratios range from 134 to 191.”
The LTC business remains pressured by legacy blocks written decades ago using assumptions that are very different from what companies have actually experienced. The report notes that policies sold in 2004 and prior have an overall direct incurred loss ratio of 284, a striking contrast to policies sold in 2013 and later, which have an overall direct loss ratio of only 17. Although the loss ratios of recent blocks are more favorable than those written many years ago, LTC insurance remains a highly risky product because it was—and to some degree still is—priced with many unknowns.
To access the full copy of AM Best’s market segment report, visit http://www3.ambest.com/bestweek/purchase.asp?record_code=335414.
A video discussion of this report also is available at http://www.ambest.com/v.asp?v=ambltc823.