After the pain: poor results and worries about future claims have tested the optimism of the long-term-care industry, but some industry veterans say insurers and reinsurers ought to be more enthusiastic about new business.Buy low, sell high. It's so easy to say, but so hard to do. And strangely enough, that might be the kind of situation that has developed among buyers and sellers of long-term-care reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. . Despite a better outlook for new business, they seem afraid to act. Primary writers want to buy more reinsurance even though LTC LTC abbr. lieutenant colonel insurance market conditions have improved, and the quality of new business might argue for retaining more of the risk. Conversely con·verse 1 intr.v. con·versed, con·vers·ing, con·vers·es 1. To engage in a spoken exchange of thoughts, ideas, or feelings; talk. See Synonyms at speak. 2. , reinsurers don't want to sell it at terms direct writers want, even though new business may be poised for an upturn, thanks to higher prices and rising interest rates. "It really should be the reverse," said Claude Thau, president of Thau Inc. and formerly an executive who ran LTC insurance business for a major insurer. "The prices are now more sound, and people know better what they're doing. The reinsurers should be trying to get more business, and the direct carriers should have been more interested earlier than they should be now. But people are reactive. People are more interested in reinsurance now than before, and the reinsurers are less interested in giving it than before." Sales decline in three of the past four years, culminating in a 28% drop in last year's first three quarters, is behind the uneasiness and fear. Industry veterans say reinsurance choices today are limited. The top three LTC reinsurers are General Re Life Corp., GE Insurance Solutions and Munich Re Munich Re AG, in German Münchener Rück AG (ISIN: DE0008430026), is the world's second largest reinsurance company with over 5,000 customers in 160 countries and has its headquarters in Munich, Germany. . Their resources are mainly devoted to the industry's adverse legacy issues, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. Dan Cathcart, a senior consultant with Tillinghast, a Towers Perrin Towers Perrin is a global professional services firm. It was established 1 March 1934 as Towers, Perrin, Forster & Crosby. The umbrella name of Towers Perrin was adopted in 1987. company, and an actuary actuary One who calculates insurance risks and premiums. Actuaries compute the probability of the occurrence of such events as birth, marriage, illness, accidents, and death. with many years of experience with other companies. "They haven't seen returns that they desired in the LTC business," said Cathcart. "Most companies in LTC have not. Most companies' resources are trying to deal with rehabilitating their portfolios as much as possible. There's more of a fight for capital for growth, because they don't have proof yet that LTC is a consistently viable business for high predictable returns. You package all that together, and the direction of the reinsurer re·in·sure tr.v. re·in·sured, re·in·sur·ing, re·in·sures To insure again, especially by transferring all or part of the risk in a contract to a new contract with another insurance company. strategy right now has to be opportunistic opportunistic /op·por·tu·nis·tic/ (op?er-tldbomacn-is´tik) 1. denoting a microorganism which does not ordinarily cause disease but becomes pathogenic under certain circumstances. 2. or leaning toward very selective growth." Cathcart said reinsurers today lack the resources, capital and management commitment to grow as much as the insurance market would like to see, and that limits choice for a direct writer, both from an innovation standpoint as well as general leveraging and profitability. The size of the LTC reinsurance market also discourages reinsurers from becoming more involved. Cathcart said the LTC market today draws about $8 billion annually in premiums, but the reinsurance market is less than 10% of that. "There is a handful of reinsurers that have thought about, or are still thinking about, entering the LTC reinsurance market, but it's tough for them to get the full support of their management because of the size of the reinsurance market," he said. "Even assuming they can convince management that the market has now hardened and that there's a great opportunity for upside potential Upside potential The amount by which analysts or investors expect the price of a security may increase. upside potential The potential price or gain that may be expected in a security or in a security average, generally stated as the dollar , which I do believe it now is, it's tough to get confidence that there's enough scale to be attractive." Cathcart suggested it's likely that only the second tier of LTC writers, those that rank 11 through 25 by premium, would be interested in today's typical reinsurance because the top 10 have enough experience and confidence in their product. The market share of those second-tier companies is only about 10% to 15%, he said. Another deterrent de·ter·rent adj. Tending to deter: deterrent weapons. n. 1. Something that deters: a deterrent to theft. 2. for entry into LTC insurance for both reinsurers and insurers is that rating agencies have appeared to view the product line negatively, added Cathcart. An important ingredient for industry success is consistency of understanding of the product risks and the appropriate capital needed to support the business, he said. Fearing the Long Term Historically, reinsurers have provided coverage on a quota-share basis-sharing a percentage of the premium and the risk--so that profitability would be roughly equal for each party. Reinsurers have resisted providing a kind of stop-loss arrangement in which direct writers take on the risk up to a certain point, after which reinsurance would kick in. That is tail-end risk, the most volatile piece of LTC, and the kind that the top 10 writers would like to buy, Cathcart said. "The greatest unknown is long term," he said. "Because the market is relatively new and expertise is limited, reinsurers haven't had to go in that direction. But long term, if a reinsurer wants to grow in this market, it has to come up with more innovative, creative offerings such as that." Reinsurers have also historically offered expertise they gain from working with multiple clients. Thus, they can help a direct writer benchmark its performance from underwriting Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. to claims to actuarial ac·tu·ar·y n. pl. ac·tu·ar·ies A statistician who computes insurance risks and premiums. [Latin assumptions, and they can identify best practices. But more recently, the consulting world has developed enough of a client base and data to provide similar services, and reinsurers have been so busy with the rehabilitation rehabilitation: see physical therapy. of portfolios and legacy issues that they've had less time to optimize optimize - optimisation what expertise they can provide to insurers. "That's why there's opportunity for a new reinsurance company without the baggage to come in even though it won't initially have that portfolio of benchmarking expertise," said Cathcart. James Glickman, president and chief executive officer of LifeCare Assurance Co., a LTC reinsurer and retrocessionaire, said that direct writers today seek the expertise that reinsurers can offer. If the market were significantly more mature, they would want new kinds of coverage for LTC's controversial risks. Glickman agreed the most common form of reinsurance is coinsurance A provision of an insurance policy that provides that the insurance company and the insured will apportion between them any loss covered by the policy according to a fixed percentage of the value for which the property, or the person, is insured. , or proportionate pro·por·tion·ate adj. Being in due proportion; proportional. tr.v. pro·por·tion·at·ed, pro·por·tion·at·ing, pro·por·tion·ates To make proportionate. reinsurance, all on a first-dollar basis. But he said there is some excess, stop-loss and excess-of-benefit. Reinsurers also provide some yearly renewable term, which is another kind of proportionate reinsurance. While regulators require that LTC policies have level premiums, primary writers are free to reinsure re·in·sure tr.v. re·in·sured, re·in·sur·ing, re·in·sures To insure again, especially by transferring all or part of the risk in a contract to a new contract with another insurance company. on a yearly renewable basis, in which premiums usually rise from year to year, because regulators only regulate what is sold to the consumer, not how direct writers buy from reinsurers, he said. Glickman said two primary writers entered the market last year and that three companies are entering this year. "As with most things, when it looks darkest, that's when the deepest opportunities exist," he said. "And we started to emerge from that dark period because the products out there today are by definition priced with much more conservative assumptions. Most of the assumptions only have upward opportunities. Risk-based capital requirements Risk-Based Capital Requirement A stated requirement of liquid reserves placed upon banks and institutions that deal in risky ventures. Notes: These requirements exist for the protection of investors who hold an interest in these types of businesses. have been significantly reduced starting with the end of this year for new companies, though they may be higher for established companies, and the prospects for profitability, especially if interest rates go up over the next 12 to 24 months, look very bright. And, of course, the demographics The attributes of people in a particular geographic area. Used for marketing purposes, population, ethnic origins, religion, spoken language, income and age range are examples of demographic data. every year are becoming more important." Mistakes of the Past So why aren't LTC executives, who after all are quite likely to understand the virtues of buying low and selling high, failing to grasp new opportunities? Than believes the reasons have to do with corporate culture. At major insurers, for example, the person responsible for LTC insurance is not at the upper levels of the company. "If I have been aggressive, projected good profits in the past, and they didn't materialize ma·te·ri·al·ize v. ma·te·ri·al·ized, ma·te·ri·al·iz·ing, ma·te·ri·al·iz·es v.tr. 1. To cause to become real or actual: By building the house, we materialized a dream. , that's a strike against me," said Thau. "I'm scared to do that again. If I make the same mistake twice, my career is shot. And the person I report to has been embarrassed by relying on me." Having been burned once, the carriers don't want to take the chance of a second disaster, Thau said. "So the carriers tend to be very conservative about their profitability. In a few years, as they start getting more confident that the business is being priced profitably, you'll see the carriers devoting more money toward marketing, research, things like that, which they're not as keen on right now, some of them. That's starting to turn around, and it will turn around increasingly in the next couple of years as they see the results. "By the same token, the reinsurers had people who were responsible for LTC insurance who were wrong, so people's careers are in danger, and their management is in danger." While Thau said it makes sense now for direct writers to take on more risk, he thought it made no sense when he ran the LTC business for a major carrier. He said he reinsured 75% of his risk even though his actuary wanted to keep more and the person to whom he was reporting kept asking why he wasn't retaining more. "When you get into a new type of policy, something you don't have a lot of experience in, it's really good to reinsure it," he said. He also sought to avoid deviations from expected returns Expected Return The average of a probability distribution of possible returns, calculated by using the following formula: , including favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. deviations. "When you're in a line of business that's large and has a lot of experience, favorable deviations are great, but when you're in something that people don't know Don't know (DK, DKed) "Don't know the trade." A Street expression used whenever one party lacks knowledge of a trade or receives conflicting instructions from the other party. that much about, they're not, because your management is likely to think you're sandbagging Sandbagging is the practice of deceptively portraying oneself as being in a weaker position than is true.
Learn More General Re Life Corp. A.M. Best Company # 06234 Distribution: Direct sales staff LifeCare Assurance Co. A.M. Best Company # 09200 Distribution: No systematic sales strategy For ratings and other financial strength information about these companies, visit www.ambest.com. Key Points * Long-term-care insurers and reinsurers may currently be too pessimistic pes·si·mism n. 1. A tendency to stress the negative or unfavorable or to take the gloomiest possible view: "We have seen too much defeatism, too much pessimism, too much of a negative approach" about the future of LTC insurance. * The size of the LTC market is still small, but higher prices and positive regulatory changes may help improve profitability. * The LTC market may not grow until reinsurers become more innovative and offer coverages other than quota share For This article is about quota shares (shares of the quota). For other usages of quota, see, see . A quota share is a specified number or percentage of the allotment as a whole (quota), that is prescribed to each individual entity (see Non-tariff barriers to trade). . * The growth of LTC reinsurance may currently be stifled sti·fle 1 v. sti·fled, sti·fling, sti·fles v.tr. 1. To interrupt or cut off (the voice, for example). 2. more by corporate culture than by underlying LTC fundamentals. Top Writers *, Individual LTC Insurance, Based on New Premiums (Alphabetically Listed) 2005, First Six Months Allianz Life Bankers Life and Casualty Genworth Financial John Hancock Lincoln Benefit Life Massachusetts Mutual MetLife New York Life Northwestern Prudential Share 85% * Based on participating carriers Source: Limra International LTC Insurance's Ups and Downs ups and downs pl.n. Alternating periods of good and bad fortune or spirits. ups and downs Noun, pl alternating periods of good and bad luck or high and low spirits 1990 Unexpected Experience Poor Underwriting Outcome 110% of Morbidity morbidity /mor·bid·i·ty/ (mor-bid´it-e) 1. a diseased condition or state. 2. the incidence or prevalence of a disease or of all diseases in a population. mor·bid·i·ty n. Expected Effect on Profits -4% ROE A fictitious surname used for an unknown or anonymous person or for a hypothetical person in an illustration. A lawsuit is generally named for the persons who are parties to it. 1992 Unexpected Experience Liberal Contract Language Outcome 105% of Morbidity Expected Effect on Profits -2% ROE 1997 Unexpected Experience Low Voluntary Lapse (language) LAPSE - A single assignment language for the Manchester dataflow machine. ["A Single Assignment Language for Data Flow Computing", J.R.W. Glauert, M.Sc Diss, Victoria U Manchester, 1978]. Outcome 50% of Expected Effect on Profits -10% ROE 1998 Unexpected Experience Low Claim Incidence Outcome 70% of Expected Effect on Profits +20% ROE 1999 Unexpected Experience More Early Claim Terminations Outcome 110% of Expected First-Year Terminations Effect on Profits +4% ROE 2001 Unexpected Experience Low Investment Income Outcome 100 Basis Points Effect on Profits -4% ROE 2002 Unexpected Experience Fewer Deaths Before Claims Outcome 75% of Expected Deaths Effect on Profits -5% ROE 2004 Unexpected Experience Fewer Deaths During Claim Periods Outcome 80% of Expected Deaths Effect on Profits -6% ROE Note: Experience and profit implications vary by company. ROE means return on equity. 20% rate increases improved ROE by 5% to 8% depending on timing. The long-term-care market premiums have hardened by nearly 40% since 2000. Source: Towers Perrin Greater Number of LTC Writers Would Push Industry Growth Last year's exit from the long-term-care business by several companies may not mean the product line is dead in the water. At least one LTC executive predicts that many more companies will be in the business a decade from now. There always has been a turnover of companies, said James Glickman, president and chief executive officer of LifeCare Assurance Co., a Woodland Hills, Calif.-based reinsurer and retrocessionaire. "The big change over the last decade is that it's gone from primarily a smaller health company providing the product to primarily a larger life company," he said. "That dynamic will continue. The reason more life companies haven't pushed into the product sooner is because it's still hard at this level of production in the marketplace as a whole for large companies to successfully sell what I'll call smaller amounts of business." Glickman said new big companies have gotten in because they want to be permanent players as this market grows, but the current challenge is that, in terms of new business, LTC is only a $1 billion market. "I'm guessing that 10 years from now, it'll probably be a $10 billion market, and you'll see probably half of the top 100 companies on the life side in the business," he said. Glickman expects that 76 million baby boomers See generation X. , who now range in age from 41 to 59, will drive the market in coming years. With the average LTC insurance issue age in the mid to upper 50s, the group has barely begun to buy the product. He said the boomers will retire with more money than previous generations, and because of a mobile society, their children will probably not live close to them. "Anything you look at in a demographic profile A demographic or demographic profile is a term used in marketing and broadcasting, to describe a demographic grouping or a market segment. This typically involves age bands (as teenagers do not wish to purchase denture fixant), social class bands (as the rich may want leads you to believe that people who need this kind of protection are going to discover it either through their own experiences with their parents or through hearing about it as it starts to affect them," he said. "That curve lasts for at least the next 20 years." General Re: LTC Adjustments Still Needed While some industry veterans are optimistic op·ti·mist n. 1. One who usually expects a favorable outcome. 2. A believer in philosophical optimism. op about the outlook for long-term-care insurance, others are less enthusiastic. Barry Eagle, a vice president at General Re Life Corp., a major provider of LTC reinsurance, explained why reinsurers remain cautious about writing new business. Is there enough reinsurance available to primary writers of LTC insurance? The number of active LTC reinsurers has decreased somewhat, and those still active have become more selective. In addition, fewer direct writers seem willing to provide quota Share reinsurance to other direct writers, so the combination probably has reduced overall capacity. Why is there less reinsurance available? Many organizations, including not just reinsurers but also insurers and rating agencies, seem more aware than ever that past experience and assumptions may not be a reliable predictor of the future. How many other reinsurers offer LTC reinsurance? There seem to be four or five reinsurers still willing to accept business under the right circumstances. What are the pros and cons pros and cons Noun, pl the advantages and disadvantages of a situation [Latin pro for + con(tra) against] of reinsurance in the LTC business? Today, reinsurance is not only risk transfer but also risk management, and using the combined expertise of both organizations to increase the likelihood of overall profitability. If you turn down business, what are usually the reasons? There are a number of reasons that can come into play, including some of the pricing assumptions, underwriting philosophy, plan design, claims resource and procedures, and overall corporate objectives. What is the outlook for claims severity? It seems that claims continuance The adjournment or postponement of an action pending in a court to a later date of the same or another session of the court, granted by a court in response to a motion made by a party to a lawsuit. is greater than anticipated, and that this is likely to continue, particularly with respect to home health care. Why are you comfortable with the business you have written? Most companies in this industry have improved their pricing, product design and underwriting in recent years, though some adjustments are still needed. What are the alternatives to reinsurance, and how good are they? Direct writers can always choose to retain the full risk. Carriers can use qualified product-development consultants and either include higher margins or be extremely selective about whom they insure, in order to increase their comfort level. Would captives be a good alternative to LTC reinsurance? Are they in use? I'm not aware of any company using a captive entity for LTC risks. Getting any type of aggregate excess reinsurance to limit the captive's maximum exposure might be very difficult. |
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