Underwriting Reassessments Drive Long-Term-Care Reform
After years of public scorn for massive premium increases and internal wrangling over mispriced contracts, new forms of long-term care (LTC) coverage are seeing a notable uptick in sales.
Professional and public organizations are digging deeply into the underwriting and actuarial assumptions that were behind traditional LTC policies in hopes of avoiding the same mistakes for the newer hybrid or combination contracts that are based on annuities or permanent life insurance with riders for LTC and disability.
There is, however, not yet any good answer for what to do with the traditional policies that remain in force.
“The cost has never really been a low as people wanted it to be, and carriers were never able to capture the [younger and healthier] people looking ahead.” — Robert Kerzner, president and CEO, Limra, Loma and LL Global
Robert Kerzner, president and CEO of Life Insurance Marketing & Research Association (Limra), Life Office Management Association (Loma), and LL Global, said that traditional LTC coverage was caught between multiple mandates.
“The cost has never really been a low as people wanted it to be, and carriers were never able to capture the [younger and healthier] people looking ahead,” he said.
“The LTC contracts sold were primarily to those close to the age where they would use them. So the business never really got off the ground. There were never a lot of carriers and also not a lot of distribution.”
External factors exacerbated the struggles of traditional LTC coverage. Two in particular were killers: low lapse rates and low interest rates.
“What were the lessons learned?” Kerzner asked rhetorically. “The industry did not have a lot of historical data. We all want to be innovative. I push the industry to innovate. But consumer behavior is not always logical. Another factor was medical breakthroughs. Those changed the game.”
The ideas for LTC 2.0 — hybrid or combination contracts — came from research as sales and premiums for traditional policies shriveled.
“People don’t like paying for insurance and getting nothing back,” said Kerzner. While one of the criticisms of traditional coverage was that they were too complicated, he said, the riders and options on combination contracts are seen as adding value.
Bruce Stahl is vice-chair of the LTC Reform Subcommittee of the American Academy of Actuaries, which expects to publish its analysis and recommendations of LTC by the end of the year.
He is frank about the value of what amounts to forensic underwriting in LTC. “It is helpful to understand the assumptions of the ’80s and ’90s. People made assumptions that were at the time reasonable estimates. The assumptions being made now on newer contracts are more conservative,” especially regarding interest and lapse rates.
“In the early ’90s, the assumption was that lapse rates for LTC coverage was going to behave like Medicare supplement policies, which were about 6 percent at the time. Actual lapse rates for traditional LTC contracts have been less than 1 percent. That has had a strong effect because of more benefits paid out.”
“Insurance companies are designed to be profitable. If traditional LTC is not profitable, it won’t be offered.” — Jesse Slome, executive director, American Association for Long Term Care Insurance
Jesse Slome, executive director of the American Association for Long Term Care Insurance, said that it is difficult to document the traction that hybrid LTC contracts are gaining because they are so new, and also because they are spread among permanent life and annuities.
“No one is really tallying the data, but at the Limra-Loma Conference in New Orleans [where he was chair of a panel discussion in September], I was told by carriers that on something between 50 percent and 80 percent of their new life policies, the insured checks the option to get an LTC payout.”
Slome is forthright about the future of the line. “Insurance companies are designed to be profitable. If traditional LTC is not profitable, it won’t be offered. If hybrids are, they will be offered.”
That still leaves the question of what becomes of the early adopters from the ’80s and ’90s, the ones who thought they were being economical and responsible and are clinging to their traditional contracts at the confounding lapse rate of less than 1 percent.
For years, the financial press has been full of horror stories of premium increases of 50 percent, 60 percent and in some cases more than 100 percent. Carriers have been bombarded with outraged complaints, as have regulators and even Slome’s organization.
“What to do about old policies?” asked Slome. “I don’t know. But I suspect the few carriers remaining in that market are counting on state regulators continuing to approve premium increases, and also counting on interest rates rising. Shares of Genworth [the largest issuer of traditional LTC contracts] have become in effect a type of interest-rate play.”
Specialization Aids Broker Success
Focusing on niches and leveraging the latest technologies are two ways successful insurance agencies are boosting their bottom lines – even as organic growth across the sector has slowed a bit, according to the Independent Insurance Agents & Brokers of America (IIABA or the Big I).
A survey of 260 so-called “best-practices” agencies determined by the trade group and Reagan Consulting found that best-practices firms grew organically by an average of 6.9 percent in 2015, down from the recent high of 9 percent in 2012, according to the “2016 Best Practices Study.”
While growth has slowed, the best practices agencies found that specialization enhances growth and creates new revenue streams.
“We write this type of coverage all over the state because we get a lot of referral business through word-of-mouth.” Dennis Hilton, president and CEO, Cheney Insurance
One of the best-practices agencies in the study, Cheney Insurance in Damariscotta, Maine, developed a niche for insuring “Maine guides,” professionals who guide clients through outdoor activities such as hunting, fishing and kayaking, said Dennis Hilton, the agency’s president and chief executive officer.
“Maine guides can have basic or more unique exposures depending on their operations, in terms of their cabins, camps or lodges, as well as their boats, canoes and kayaks,” Hilton said. “Our agents are very familiar with the unique exposures associates with guiding, and the many requirements they need to be concerned with.”
For example, his staff has the expertise to help guides complete the paperwork and provide certificates of insurance required by large corporate landowners that allow guides to access their property during the various hunting seasons.
The agency handles these types of issues frequently, whereas many other agencies in the state do not have that level of expertise, Hilton said.
“We write this type of coverage all over the state because we get a lot of referral business through word-of-mouth,” he said. “As a result, we write more coverage for Maine guides than any other agency.”
Another best-practices agency, Minard-Ames Insurance Services LLC/Insurica in Phoenix, specializes in brokering insurance for the construction industry, said Blake Johnson, president.
“Fortunately for us, the construction industry relative to insurance has become very complex, requiring a high degree of technical expertise,” Johnson said. “This has provided us a tremendous advantage and increased our value proposition significantly.
“For contractors today, it’s all about staying out of trouble, and how we can help them accomplish that.”
For example, contracts are an important part of every construction project, as the construction industry tends to be fairly litigious, he said. As such, ensuring proper risk transfer within these contracts is critical, and insurance plays a major role.
“Whether that advice is to a general contractor regarding what to require of those working for them or advising a subcontractor when the requirements imposed upon them exceed that for which they are insured — or are simply unreasonable. It is all part of how we partner with our customers,” Johnson said.
Focusing on this niche also enables his firm to be able to attract new producers: “They come to us because our reputation within the construction industry provides them a leg up,” he said.
Best-practices agencies are also leveraging new technologies, according to the IIABA study, which cited data from CB Insights that showed more than $1 billion in technology investments by insurance startups during the first half of 2016.
Cheney Insurance has a mobile app that assists its customers in various scenarios, Hilton said.
Another trend noted in the IIABA study is the significant increase in the average age of employees at most agencies.
If they are involved in an auto accident, the app helps them take photos of the vehicles and the scene, which can then be sent directly to the agency. Customers with homeowner policies can use the app to create a household inventory, taking photos of big items in case they are ever stolen or damaged.
The agency provides the app through a subscription with a mobile app vendor, Insurance Agent.
“We also excel at collecting and leveraging client email addresses,” he said. “Most agencies don’t do a very good job of soliciting emails from clients, but we have acquired 85 percent of our client emails by incentivizing our staff to always ask, and then we use automated digital marketing technology to stay in close contact.”
The agency sends clients birthday or seasonal e-cards, and many people respond very favorably, “which keeps our agency in the top of their mind for the next time they may have an insurance need,” Hilton said.
Minard-Ames Insurance Services provides technology that offers a template for its construction firm customers to issue their own pre-approved certificates of insurance or endorsements, such as for additional insureds or waivers of subrogation.
“This saves our customers time, as they can do it 24/7 and from their mobile phones,” Johnson said.
Another trend noted in the IIABA study is the significant increase in the average age of employees at most agencies.
“Savvy firms are placing an emphasis on early succession planning for all key leadership positions,” according to the IIABA. “Best-practices agencies recognize that their future independence hinges on creating an environment that attracts and retains talented employees to successfully perpetuate their business.”
The study also noted that the pace of consolidation has steadily increased since 2009, coming off low merger and acquisition activity during the Great Recession. According to SNL Financial, 469 transactions were announced in 2015.
Every three years, the trade group collaborates with Reagan Consulting to select “best practices” firms throughout the nation for outstanding management and financial achievement in six revenue categories ranging from less than $1.25 million to more than $25 million.
Agencies are nominated by either a Big I-affiliated state association or an insurance company, and qualified based on operational excellence. Financial and benchmarking information for the participating agencies are also reviewed and updated for the following two years.
This is the 24th edition of the annual benchmarking analysis and the first year of the current three-year study cycle.
Why Marine Underwriters Should Master Modeling
Better understanding risk requires better exposure data and rigorous application of science and engineering. In addition, catastrophe models have grown in sophistication and become widely utilized by property insurers to assess the potential losses after a major event. Location level modeling also plays a role in helping both underwriters and buyers gain a better understanding of their exposure and sense of preparedness for the worst-case scenario. Yet, many underwriters in the marine sector don’t employ effective models.
“To improve underwriting and better serve customers, we have to ask ourselves if the knowledge around location level modeling is where it needs to be in the marine market space. We as an industry have progress to make,” said John Evans, Head of U.S. Marine, Berkshire Hathaway Specialty Insurance.
CAT Modeling Limitations
The primary reason marine underwriters forgo location level models is because marine risk often fluctuates, making it difficult to develop models that most accurately reflect a project or a location’s true exposure.
Take for example builder’s risk, an inland marine static risk whose value changes throughout the life of the project. The value of a building will increase as it nears completion, so its risk profile will evolve as work progresses. In property underwriting, sophisticated models are developed more easily because the values are fixed.
“If you know your building is worth $10 million today, you have a firm baseline to work with,” Evans said. The best way to effectively model builder’s risk, on the other hand, may be to take the worst-case scenario — or when the project is about 99 percent complete and at peak value (although this can overstate the catastrophe exposure early in the project’s lifecycle).
Warehouse storage also poses modeling challenges for similar reasons. For example, the value of stored goods can fluctuate substantially depending on the time of year. Toys and electronics shipped into the U.S. during August and September in preparation for the holiday season, for example, will decrease drastically in value come February and March. So do you model based on the average value or peak value?
“In order to produce useful models of these risks, underwriters need to ask additional questions and gather as much detail about the insured’s location and operations as possible,” Evans said. “That is necessary to determine when exposure is greatest and how large the impact of a catastrophe could be. Improved exposure data is critical.”
To assess warehouse legal liability exposure, this means finding out not only the fluctuations in the values, but what type of goods are being stored, how they’re being stored, whether the warehouse is built to local standards for wind, earthquake and flood, and whether or not the warehouse owner has implemented any other risk mitigation measures, such as alarm or sprinkler systems.
“Since most models treat all warehouses equally, even if a location doesn’t model well initially, specific measures taken to protect stored goods from damage could yield a substantially different expected loss, which then translates into a very different premium,” Evans said.
That extra information gathering requires additional time but the effort is worth it in the long run.
“Better understanding of an exposure is key to strong underwriting — and strong underwriting is key to longevity and stability in the marketplace,” Evans said.
“If a risk is not properly understood and priced, a customer can find themselves non-renewed after a catastrophe results in major losses — or be paying two or three times their original premium,” he said. Brokers have the job of educating clients about the long-term viability of their relationship with their carrier, and the value of thorough underwriting assessment.
The Model to Follow
So the question becomes: How can insurers begin to elevate location level modeling in the marine space? By taking a cue from their property counterparts and better understanding the exposure using better data, science and engineering.
For stored goods coverage, the process starts with an overview of each site’s risk based on location, the construction of the warehouse, and the type of contents stored. After analyzing a location, underwriters ascertain its average values and maximum values, which can be used to create a preliminary model. That model’s output may indicate where additional location specific information could fill in the blanks and produce a more site-specific model.
“We look at factors like the existence of a catastrophe plan, and the damage-ability of both the warehouse and the contents stored inside it,” Evans said. “This is where the expertise of our engineering team comes into play. They can get a much clearer idea of how certain structures and products will stand up to different forces.”
From there, engineers may develop a proprietary model that fits those specific details. The results may determine the exposure to be lower than originally believed — or buyers could potentially end up with higher pricing if the new model shows their risk to be greater. On the other hand, it may also alert the insured that higher limits may be required to better suit their true exposure to catastrophe losses.
Then when the worst does happen, insureds can rest assured that their carrier not only has the capacity to cover the loss, but the ability to both manage the volatility caused by the event and be in a position to offer reasonable terms when renewal rolls around.
For more information about Berkshire Hathaway Specialty Insurance’s Marine services, visit https://bhspecialty.com/us-products/us-marine/.
Berkshire Hathaway Specialty Insurance (www.bhspecialty.com) provides commercial property, casualty, healthcare professional liability, executive and professional lines, surety, travel, programs, medical stop loss and homeowners insurance. The actual and final terms of coverage for all product lines may vary. It underwrites on the paper of Berkshire Hathaway’s National Indemnity group of insurance companies, which hold financial strength ratings of A++ from AM Best and AA+ from Standard & Poor’s. Based in Boston, Berkshire Hathaway Specialty Insurance has offices in Atlanta, Boston, Chicago, Houston, Los Angeles, New York, San Francisco, San Ramon, Stevens Point, Auckland, Brisbane, Hong Kong, Melbourne, Singapore, Sydney and Toronto. For more information, contact [email protected].
The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service. Any description set forth herein does not include all policy terms, conditions and exclusions. Please refer to the actual policy for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Berkshire Hathaway Specialty Insurance. The editorial staff of Risk & Insurance had no role in its preparation.