A caring proposition: CNA developed long-term-care insurance on the heels of the fledgling Medicare law.

The first long-term-care insurance product came on the scene in 1965, when the cultural and economic conditions in the United States were remarkably different from today. The result has been that today's LTC product bears little resemblance to the first.

Both Limra International and America's Health Insurance Plans credit the CNA Financial Corp. with inventing LTC insurance. CNA still has a large block of in-force business, but it stopped writing new policies in September 2003 as lower-than-expected lapse rates, interest rates and mortality pounded the industry and forced many writers to the sidelines. Genworth Financial, now the LTC industry leader with about 600,000 policies and $1.6 billion of in-force premium, traces its business roots back to another LTC pioneer, Fireman's Fund, which wrote its first policy in 1974. American Express bought that business some 11 years later, and General Electric bought the American Express business in 1995. GE spun off its LTC business and other insurance and investment lines this war through an initial public offering that created Genworth.

Before World War II, frail elderly usually went to live with one of their children if they weren't already living together in a multigenerational household, according to a history of the LTC product by AHIP As life expectancies lengthened and as children pursued careers away from the family farm or hometown, nursing homes developed as inexpensive places for help with personal hygiene, getting dressed, good nutrition and some exercise and social activity, but no medical treatment. Costs of hospitalization and nursing homes rose after the war, and medical insurance became unaffordable for many in their retirement years.

To address these problems, Congress created Medicare and Medicaid in 1965. Medicare may have served as an impetus for development of the LTC product. It provided only limited coverage for long-term care: up to 100 days, and only lot skilled nursing home services after at least three days of hospitalization if the patient entered a skilled nursing facility within 30 days of diagnosis. "Medicare made people realize there wasn't coverage," said Susan Coronel, AHIP's director for LTC. "Also, people were moving to other parts of the country, and women were getting into the work force." After Medicare benefits ran out, families had to pay out of pocket, often depleting most of their life savings.

Beyond Medicare Benefits

CNA's first product covered the skilled nursing facility benefit copayment and then continued to pay benefits beyond what Medicare was paying. Nursing homes became Medicare-certified skilled nursing facilities and operated under Medicare rules because they preferred having the government as a stable funding source. A drawback to early policies was that as patients no longer showed improvement in their conditions, they no longer met Medicare's definition of receiving skilled care and thus were no longer qualified for insurance benefits. This adversely affected patients with chronic diseases such as arthritis and especially those with dementia. Under early policies, insurers guaranteed to pay benefits for at least six months, but no longer than three years, according to AHIP's history.

While CNA's early policies were closely tied to Medicare regulations, Fireman's Fund's policies came about as a result of agents asking for a product to help in financial planning. "Issues of independence and choice kept coming up," said Buck Stinson, president of Genworth's LTC business. "Agents wanted to know how we protect their customers from the costs of skilled nursing care," he said. "'That was the advent of the product."

Stinson said the original Fireman's Fund product had a prerequisite of hospitalization. When patients signed out and then into a hospital ward or nursing facility, they were often in the final months of life. Stays were usually less than a year to one and one-half years. Policies were typically indemnity designs, and once the patient became confined, they would pay their prescribed amounts. But the policies lacked the flexibility to pay benefits to people in places other than a nursing home.

The development of new policy triggers--activities of daily living and cognitive impairment--did not evolve until the 1980s, Stinson said. These have been the industry standard for many years, and they have allowed the industry to create the wide variety of product features available today. "It took years of research, most of which was conducted by the provider community and academia, before the insurance industry felt comfortable adopting these concepts as the criteria for determining eligibility for long-term-care benefits," said the AHIP history. "Cognitive impairment and functional loss (as measured by the inability to perform activities of daily living) are now established as the most valid, objective and reliable measures of when someone needs long-term care."

No History

Early writers, of course, were handicapped by a lack of a product track record. Stinson said today's benefit triggers and underwriting evolved together over the past three decades. Where once underwriting consisted of getting answers to a few basic medical questions, it now includes ordering medical records and conducting either a face-to-face interview or a telephone interview.

"Surprisingly enough, cognitive assessments were late to the game," he said. "As the product evolved, and as more data became available from the claims database, we found that half of all claims were for cognitive disability." About half of all recent claims are for Alzheimer's disease. "Our biggest challenge today is the human brain," he said.

"You are only as good as your actuarial vision," he added. "Your product pricing assumptions are only as good as the data your actuaries can use." Inadequate amounts of data to help predict policy lapses or cognitive disability are "at the heart of what has caused turmoil of late and forced companies out of the industry," he said. With much more data today, the industry is in a much better position to adapt its underwriting and pricing to emerging trends, he said.

More than 100 companies now sell LTC insurance, up from about 50 when the product started to evolve in the mid 1980s, according to Coronel. From 1987 to 2002, the annual rate of growth in the number of policies sold has averaged 18%, albeit from a low base. Some 9.1 million LTC policies have been sold. About six million Americans currently own LTC insurance, according to Jesse Slome, editor of Long-Term Care Insurance Sales Strategies magazine and president of Sales Creators, Inc. Insurers pay out more than $1 billion in annual claims, and the industry provides about $550 billion of coverage, he said.

But in order to spur sales growth, the federal government will have to provide some tax incentive for people to buy the product, said Coronel. This could come in the way of a better tax deduction for premiums or for people to be allowed to pay for premiums tax-free through their cafeteria plans at work. "All other insurance products have some kind of preferred tax treatment," she said. But industry leaders close to the politics of the issue say favorable tax treatment is not likely as long as the federal deficit is large.

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Continental Assurance Co. (A subsidiary of CNA Financial Corp.)

A.M. Best Company # 06280

Headquarters: Chicago

Lines of Business: Long-term care is in runoff; most other life businesses sold

2003 Net Income: $37 million

Distribution (CNA): General agency, property/casualty independent agents, managing general agents, brokers and direct.

For ratings and other financial strength information about this company, visit www.ambest.com.

Long-Term-Care Insurance Products by Percentage
Of Policies Sold

Individual policies have long dominated the LTC market. Industry
sources, however, report growing employer-sponsored sales since 2002
due in part to the plan offered to federal employees.

                                                      % of all
                                                  LTC Policies
                                     % of            Ever Sold
Long-Term                   Companies (1)          as of 12/02
Care Product                    (n = 103)   (n = 9.16 million)

Individual                             94                   79

Employer-Sponsored                     20                   18

Long-Term Care as part of
a life insurance policy                 7                    3

                                     % of   Average
                                 Policies    Age of
Long-Term                    Sold in 2002     Buyer
Care Product                (n = 901,000)   in 2002

Individual                             68        60

Employer-Sponsored                     32        45

Long-Term Care as part of
a life insurance policy                NA        NA

(1) Totals more than 100% because some companies sell their products
in more than one type of market.

Source: America's Health Insurance Plans