This part of our publication presents texts which are not original. They are motivated and written under various contexts: they provide an insight on the fact that the lenghtening of the life cycle is of greater and greater concern and interest in many different directions. The counter-ageing society is an issue which needs to be perceived on the basis of a true, practical as well as theoretical, multidisciplinary approach. On the basis of this larger vision, the work, activity and research of any specialist can be better appreciated and given value within the framework of a global background of reference.
This article takes a critical look at some weaknesses in Long Term Care (LTC) underwriting and claims protocols that developed in the UK market against a backdrop of a collapsing demand for pre-funded LTC products. Although these products have all but disappeared from the UK market, important lessons can be learned to help new entrants deal more effectively with risk management of any second generation LTC products.
Pre-funded LTC plans pay benefits on failure of Activities of Daily Living (ADL) or cognitive impairment measured against set severity criteria. Reviewable regular or lump sum premiums fund pre-selected benefit levels.
LTC insurance of this type became widely available in the UK in 1990. Towards the end of 2004, however, the main providers had withdrawn their products from sale. During this timeframe the volume of sales waxed and waned but without ever reaching the levels that might be expected in an affluent society with an ageing population.
The relative failure of this LTC concept in the UK has several causes. Amongst these are a lack of customer confidence in the investment performance of long term insurance solutions (such as mortgages and pensions) and their misjudgement of the State’s appetite to pay for the future care needs of the elderly. The product was expensive and represented a difficult sale. In practice LTC was bought by a much older cohort of lives than anticipated. Their complicated risk profile and propensity to early claim caused problems for insurers and had notable effects on their profitability.
1. Weak Underwriting Protocols
One consequence of the relative lack of demand for LTC was that lax underwriting protocols developed as companies sought to maximise new business opportunities and stimulate further sales. Pressure from the sales operation probably contributed to the under-pricing of individual risks by accommodating underwriters. Early application form questions were weak, lacking specific enquiry on memory problems for example. Medical examinations followed the template used for life insurance, thereby missing important risk details in older lives. Detection of early cognitive problems initially relied on a delayed word recall test, and underwriters were guilty of generous interpretation of test scores. Additional loadings were often insufficient as underwriters exhibited a lack of understanding of co-morbidity and the real effects of ageing.
2. Philosophy of Claims Management
It was not untypical for an LTC claims philosophy to be open and helpful. Though well meaning, such an approach was often far from robust. Perhaps because UK products were non-regulated, insurers were wary of possible criticism of unfair claims handling for elderly or vulnerable policyholders.
The effect of generous claim assessment was compounded when there was a discrepancy between claim evidence and underwriting evidence, making assessment of any deterioration in physical condition over time difficult. The style and standard of written reports made by visiting nurses and occupational therapists was inconsistent and often subjective, reflecting the examiners assumptions about ageing rather than measurable change.
Although conceived as a health care product, generous LTC claims philosophies may have stepped too far over the line of helpfulness with ex-gratia and borderline settlements a common feature. The effect was perhaps magnified once benefits became payable to claimants as cash not care. Audits of UK claims portfolios highlighted examples of overactive claims management resulting in insurers seeking ways to pay claims on a scale not supported by the premiums paid by the policyholder.
A difficulty of assessment of ADL failure at claim stage is the effect of temporary and partial failure or so called ‘good-day-bad-day’ behaviour. When faced with a combination of partial failures, a simple claims option was to admit as this appeared fair and helpful despite this action undermining the pricing of the product.
3. Policyholder Behaviour
Underlying these two aspects was the anti-selective behaviour of LTC applicants. Most UK LTC customers are in the higher socio-economic groups, both financially aware and capable of affording the relatively high cost of LTC insurance. While overt non-disclosure was found to be rare, many applicants had postponed their decision to purchase LTC for as long as possible, often until they experienced difficulty with personal care or had memory problems. Weak underwriting protocols fuelled an increase in unexpected early claims.
Once in claim for ADL failure, the health of elderly policyholders was seen to improve with regular medication and care. Those claimants with cognitive decline were observed to live far longer in claim than had been expected. The UK insurers experienced a very low level of recovery from disability whilst in claim.
4. Product Design Impact
For many, the design of the products themselves was seen as a key factor in the downturn in demand. Products were regarded as complicated and with a heavy burden of underwriting. Criticism of ADL-based claims triggers is possibly misplaced as changes in these clinically described behaviours are consistently observed as people grow old. However as claims experience undermined pricing, unpopular premium reviews further stifled new growth as consumer confidence in pre-funded LTC ebbed.
Ross Campbell is Chief Underwriter at Gen Re LifeHealth, UK and is responsible for the provision of underwriting and claims services to clients in the UK and Ireland. He is a co-author of Gen Re’s international Long Term Care Underwriting Manual.
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Tags: UK LTC underwriting