The ground is rapidly collapsing under the long-term care insurance industry. Genworth Financial, a major LTC player, has been caught up in the landslide.

Genworth recently posted a quarterly loss of $ 844 million, driven in large part by the costs associated with its LTC products, according to Bloomberg. (1) The loss was the largest since Genworth parted ways with its parent company, General Electric, in 2004.

Genworth CEO Tom McInerney said in a statement: “The turnaround in this business will be more difficult and protracted.” (1) But doubling down on long-term care coverage, of which Genworth is the largest provider, will ultimately be a losing proposition, not simply challenging.

This is because the reasons why Genworth policies were very low priced in the first place have not changed today and are unlikely to change in the future; in some respects, the problems are likely to become more acute. People are living longer than ever, on average, and need a higher level of care as they age. This means that costs will continue to increase.

In a call with analysts, Genworth management responded to a question about whether it should put long-term care insurance on “liquidation,” that is, shutting down the business by stopping sales of new policies.

The response was that Genworth considered ditching its LTC insurance business, but decided to resist because state regulators are likely to approve rate increases on previously sold coverage. The company stopped selling policies in the states that refused to approve higher rates: Massachusetts, New Hampshire and Vermont. The other 47 states had reached agreements with Genworth by the end of October.

This decision implicitly admits that even recently sold policies are likely to remain undervalued. Insurers have consistently underestimated how quickly the costs of care will rise and how many customers will buy and use their LTC policies. And Genworth’s decision also overlooks the main problem of opposing screening: As premiums rise, healthier customers, who are less likely to need expensive benefits, have stronger incentives to drop their policies, leaving the insurer with only the sickest and most expensive part of the coverage. at-risk group.

The other argument in favor of staying in the long-term care market is that low interest rates have resulted in lower-than-expected returns on invested premiums. This observation is true. But it is also a problem that affects all types of insurance, not just long-term care products. Yet only a dozen companies sell a significant number of LTC policies these days, compared to more than 100 companies that did a decade ago. The remaining companies have raised prices and are denying coverage to about one in five individual applicants.

Genworth shares fell 37 percent the day after it announced its financial results, and the company’s bonds are at risk of being downgraded to sub-investment grade (generally known as “junk”) status at Moody’s. . “We believe the company remains exposed to further and significant deterioration in its legacy business block,” Moody’s said. (two)

Genworth maintains that LTC insurance is a product that the market needs. This is false. LTC insurance is fundamentally an unsustainable product that cannot work in the long term, precisely because so many people can make claims against it.

What the market needs is a solution to the problem of how to affordably care for an aging population. LTC insurance does nothing to this end, although states like it because state regulators want to shift costs from Medicare and Medicaid. Doing so only moves those costs, it does not reduce them.

What we really need are more profitable ways of caring for people, ideally at home, whenever possible. An army of people, largely outside the country, is available for this work, but we have not provided any effective mechanism for those people to be here. And increasingly, various rules make it difficult for a family to hire domestic servants. This trend forces older Americans and their loved ones to use home help agencies, which are often more expensive than hiring help outright. However, in many more cases, it forces them to institutionalize people who could actually stay at home if help was available, further increasing the costs of care.

LTC insurance is proving that it is not a solution. It is not even a viable product. As it fails, we may turn our attention to the real problem.

Sources:

1) Bloomberg, “Genworth Falls After Record Loss; CEO Apologizes”

2) Bloomberg, “Genworth bonds at risk of being disposed of as junk based on Moody’s review rating”