Life insurers’ exposure to older legacy blocks of long-term care (LTC) insurance remains a top credit concern for the industry, particularly as LTC actuarial assumption reviews approach, Moody’s Investors Service says in a new report.
Actuarial assumption reviews for LTC insurance, which provides financial support for individuals unable to care for themselves, are to be undertaken over 2018, and will require companies with outdated or less defendable assumptions to make adjustments to their practices.
Moody’s noted that adjusting to align with evolving industry practice could result in a decline in margins for some companies, or even lead to additional charges.
Sachar Gonen, a Vice President at Moody’s, said: “The degree of risk depends on a specific insurer’s overall concentration in LTC, the pricing and characteristics of its block, morbidity, older age mortality, the path of interest rates, and the company’s past and future success in achieving LTC rate increases.”
These concerns were realised in January 2018, when General Electric Company (GE) took a $9.5 billion pretax GAAP charge related to its LTC insurance portfolio, in addition to contributing $15 billion over seven years to its insurance operating companies.
However, Moody’s believes the magnitude of GE’s LTC-related charge is not indicative of general industry conditions, as it was largely concentrated on older vintage business written through its reinsurance business.
GE’s key challenges are its exposure to underpriced limited pay LTC policies, the prevalence of policies with rich features like lifetime benefits and compound inflation riders, and its exposure to policies via reinsurance, including through a reinsurance pool which was likely under-reserved.
Moody’s also expressed concerns over limited-pay LTC products, which allow policyholders to pay premiums in a single payment, annually over 10 years, or annually up to age 65, and which can be extremely costly for insurers, particularly when combined with lifetime benefits and compound inflation riders.
Additionally, Moody’s analysis of 2017 LTC supplement filings revealed a worrying deterioration in claims trends for some issuers, although the ratings agency claimed that this trend was in line with its expectations.
