Enter this market at your own risk: for a long-term care insurance policy form, whose lifetime averages three to five years, the startup sales strategy should target a minimum of $5 million of annual new sales premium, says one long-term care industry expert

Dan Cathcart

What has opportunity knocking vigorously at the front door and past participants running for cover out the back? It could be any number of things, but in this case we're referring to the long-term care insurance (LTCI) industry--an industry that has not only had some clear long-term leaders, but has seen a few short-term casualties and many benchwarmers.

How can yon not be attracted to a market with an ideal demographic horizon, a product that can significantly benefit society, and a sales penetration of only 7 percent? In addition, the product has greatly matured, credible experience has developed, and industry premium rates have hardened lately at an average of at least 20 percent to 30 percent. That figure is based on industry rate increases and new generation product pricing-increases which have generally been due to high persistency and low investment income. Meanwhile, the considerable potential of morbidity improvement due to anticipated medical advances has yet to be recognized. From an actuarial and business view, it's a prime time to get in the LTCI race.

Before insurance carriers make the dash, however, it's important that they consider their positioning on the three main criteria: scale, profitability and capital. Although these are basic concepts, unexpected results on at least one of those three fronts has been forcing more carriers lately to scale back efforts or totally exit the LTCI business. Of the $1.2 billion of new premium sold in 2002 by approximately 120 active insurers, the top 20 companies produced 92 percent.

SUCCESS DEPENDS ON SCALE

The success of ERC's clients has been proportional to their strategic planning, investment and commitment. Even those who have been successful, however, would agree it's extremely challenging. LTCI is not a commodity product, but instead requires a very deliberate educational process. Agent training materials and expertise are critical. The same is true for developing a niche sales advantage and compensation commensurate with other product lines and competitors. No matter if a carrier builds or buys its agency force, it's important to remain focused and fully understand one's desired scale. Obtaining $15 million in new sales in the LTCI market is more challenging than it seems and actually places a company in the heady stratosphere of the top 20.

Investment in marketing tools is of course only a portion of the initial investment. Product development, filing and full administrative setup alone can easily cost nearly $500,000. Without significant scale, a company can't begin to compete profitably with the industry leaders. For example, an investment of $1 million at startup would require a 17 percent breakeven expense load for a policy generation which only results in $1 million of new sales, while a policy generation which drives over $50 million of new sales virtually eliminates concern for such costs. Of course, if these costs are not included in the premium calculation they are still relevant and instead fall to bottom line.

The top 20 LTCI carriers all have scale, which allows them to maintain product development and filing costs in the range of 1 percent of premium. Therefore, to be a viable player selling an LTCI policy form whose lifetime averages three to five years, the sales strategy for startup should target a minimum of $5 million of annual new sales premium.

PAYING A PRICE

Certainly some carriers have paid the price for entering the LTCI market. Success depends on having the spectrum of expertise--product development, marketing, underwriting and claims management. Although persistency and investment income experience has not been positive from a profitability standpoint, claim experience for carriers who didn't sacrifice up front diligence for scale has been a balancing item. History shows that if a carrier makes an error in one or more of the risk management control phases (e.g. pricing, underwriting, or claims), the impact on claim costs can be unfavorable.

Of ERC's client product generations, seven have seen returns less than 5 percent inception-to-date return on equity, 18 have seen returns greater than 20 percent, and 33 clients fall in between. It is clear how influential the quality of insureds, pricing and processes can be on results.

Most LTCI carriers have generated results in the range of their target; however, the potential for being an outlier definitely exists. A majority of the variation can be explained from the morbidity resulting from different risk management practices. Insurers should consider accessing expertise from the outside--from consultants, TPAs, and reinsurers--so the consequences of errors and misjudgments can be mitigated.

SALES PROJECTIONS KEY

The latest challenge the industry. faces is maintaining ratings. LTCI in particular absorbs capital. While scale is a necessity on one end, the opposite concern is excessive growth. When most companies first entered the LTCI industry, capital modeling was not a high priority. As a result sonic companies are now curtailing sales or exiting the market altogether.

Sales projections need to be developed for at least a span of five years. The greater the growth, the greater and longer the surplus strain that's incurred. For a portfolio which starts with $10 million of new sales and growth at 10 percent for four more years, after 10 years assets and capital to support the business could easily approach $340 million ($300 million in statutory reserves and $40 million in risk-based capital). Offshore financing and reinsurance relationships are typical solutions for easing the surplus strain impact of rapid growth.

As with most riddles, in retrospect the answer is often quite apparent. The LTCI riddle can be explained simply by the fact that historically there has been a diversity in the way companies have approached the market and in the manner in which they formulate their strategy with respect to scale, profitability and capital. The more rigor companies apply to their processes--both at the time of entry and with ongoing maintenance--the more they have prospered. The LTCI market is more actuarially stable and just as promising as ever. If emphasis is placed on preparation and the utilization of the expertise available in the industry, the journey can be rewarding and lucrative.

Benefits: They Cost More but Yield Less

While risk managers rack their brains to find ways to pay for the rising cost of the benefits through the use of captives and alternative financing vehicles, employees don't seem all that thrilled with what they are getting after all. In an annual survey of employees conducted by MetLife, respondents appear less satisfied with their benefits packages last year than they did in 2002, according to the Study of Employee Benefits Trends.

Only 32 percent of employees surveyed felt satisfied with their current benefits, down from the 41 percent a year earlier.

One explanation for the drop in satisfaction may reflect the fact that employers are offering less support for benefits packages than they used to. looking instead to shift more of the costs to the workers.

In a significant departure from the 2002 findings, 54 percent of the employers surveyed reported that controlling and minimizing the costs of benefits packages was their main benefits objective. Employers said that was more important than retaining workers and increasing worker satisfaction.

Of the employees who reported receiving coverage through the workplace, 33 percent reported that their company paid the entire cost of their disability insurance, 38 percent said their company paid the entire cost of basic term life insurance, and 35 percent said their employer paid for the entire cost of accidental death and dismemberment insurance.

Of the respondents who obtained traditional benefits through their employer, 77 percent received subsidized medical insurance, 71 percent received subsidized dental insurance and 70 percent received subsidized vision care.

The report also found that 28 percent of employees surveyed said they were interested in having their company provide more choices of voluntary benefits.

--John McDonald

DAN CATHCART is vice president of Pricing, Long-term Care and Critica III-ness, GE's Employers Reinsurance Cot potation. He can be reached at dan.cathcart@ercgroup.com.

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