In its August 20th issue, Investment News reported that Genworth Financial had received approval from regulators in 22 states to raise costs (i.e. rates) an average of 58% on $160 million of its in-force long-term care policies this year. The company had previously obtained an average 28% increase on $714 million of premiums in 2017 and a 38% hike on $719 million in 2016. Genworth’s in-force LTC book had $2.65 billion of annual premiums at the end of the 2018 second quarter.
According to the article, other insurers are also seeking to offset adverse trends in their long-term care business. For example, Mass Mutual has requested premium hikes averaging 77% this year on three-quarters of its long-term care policies. Prudential Financial, Unum Group and CNO Financial have also recorded losses on their LTC books; but so far only Prudential is reported to be actively pursuing a combination of rate increases and benefit reductions.
Genworth’s actions are unusual because it is not clear what steps are required to obtain rate increases under the original policy agreements. Investment news said that LTC insurers that have raised rates have suffered “a degree of reputational damage as some consumers have been forced to ditch policies that became too expensive.” Nearly all LTC insurance underwriters misjudged the increases in longevity and health care costs and persistently low interest rates that have produced these massive losses. The actions taken by regulators are designed to ensure that insurers are able to pay their claims and thus head off potential insolvencies. For example, Penn Treaty was declared insolvent in 2016 as a result of its LTC losses.
Genworth emphasizes that it is only pursuing relief that is “actuarially justified.” Presumably, this means that it is pursuing increases in cases where its actuarial assumptions are proved wrong by actual experience and is not trying to get out ahead of claims trends to avoid future losses. Thus, Genworth may continue to suffer losses on its LTC book, but at a reduced rate.
The news is positive for GE because GE Capital’s North American Life & Health (NALH) subsidiary has reinsured a large number of LTC policies. In January, GE booked a $6.2 billion charge related to this business and said that it would contribute $15 billion of capital to NALH, $3 billion of which has been contributed this year and the remaining $12 billion will be paid at the rate of about $2 billion per year from 2019 to 2024. About 60% of NALH’s losses are attributable to its LTC book.
As a reinsurer, NALH has accepted certain losses on these LTC books. Although it has not disclosed the exact terms of its reinsurance agreements, it is reasonable to assume that it has agreed to pay for losses above a certain level (i.e. after a deductible), possibly (hopefully) with a cap. NALH has also reinsured some of its exposure with other reinsurers, known as “retrocessionaires.” Since the deductibles have likely been fully utilized, most of these books are presumably now in a loss position; so the primary insurers are now passing on their losses to NALH.
If primary insurers are able to obtain rate increases on their LTC books, NALH as a reinsurer is likely to benefit directly. (I am assuming that NALH’s contracts require the primary insurers to take every step possible to avoid losses, which would include seeking higher rates.) GE’s settlement with regulators anticipated future rate increases, but the company continues to look for ways to reduce its future capital contributions. This includes seeking additional actuarially justified rate increases as well as looking for ways to boost investment returns, especially as interest rate rise. These efforts should help to reduce the company’s future capital contribution from the original estimates significantly over time.
August 27, 2018 (Last paragraph revised August 28, 2018 to reflect the fact that GE’s settlement with regulators anticipated future rate increases.)
Stephen P. Percoco
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