Long term care insurance
Swiss Re says there is room for a creative provider to develop flexible, innovative insurance products capable of integration with existing private and public needs.
Monday, April 17th 2000, 12:00AM
The potential for product diversity
As the needs of individuals vary greatly throughout their lifecycle, so too do their perceptions of the future and their need for risk protection. This article explores the types of LTCI products that might be attractive to individuals at different stages of their lives. Many of these products are already in existence and are examples of individual products that have been successfully developed to fill a niche in their particular markets. It should be recognised, however, that LTCI is still a relatively new concept. Although it has been adapted in a variety of ways in different markets globally, there is still enormous potential for further product diversity.
The working age market
Almost without exception demographic forecasts predict that populations in the developed world will reach very high proportions of elderly in the years 2010 to 2030. The need for people, as young as thirty, to be planning for their long years of retirement has never been greater. Yet, LTCI products have little appeal to the young.
In order to be attractive to younger people, LTCI products will need to be flexibile. Options to change both the level and type of coverage at a later date, without penalty or inconvenience, are essential. Importantly, other demands on the protection and investment budgets of people in this age group must not be ignored.
Positioning LTCI as part of an employee benefits package is perhaps one solution. Another may be the packaging of LTCI with superannuation or private pensions. Cost effective options such as these are likely to be successful with the young who not only have limited budgets but also have a heightened awareness that public programmes are unlikely to provide for their old age.
Product solutions already being marketed to working age people mostly involve the packaging of LTCI benefits with another product. Added to life insurance, LTCI can take the form of an accelerated death benefit or an option to convert to, or add, LTCI at a later date. Likewise, various disability contracts can be used as vehicles for LTCI cover.
There is also scope to redesign policies that pay a lump sum in the event of a specified illness (ie critical illness). Generally these products are not designed to pay ongoing care costs but a lump-sum benefit could be used to purchase an annuity for this purpose.
Also potentially attractive is the possibility of integrating LTCI cover with other forms of health insurance. Certainly, the inclusion of these benefits would provide the consumer with extended and more comprehensive medical coverage; a natural fit providing greater peace of mind.
The retired market
Retirement is a time for reviewing personal financial plans in order to reconcile income and assets with lifestyle expectations. There is often a mismatch! Especially so amongst the ‘asset rich, income poor’.
This scenario is not uncommon and presents a major opportunity for insurers to enable elderly homeowners to utilise the capital value of their homes to fund LTCI (also known as equity release).
Alternatively products may be designed to protect these assets in the event of the individual needing to pay for a period of long term care.
One solution, pioneered in the UK, is the packaging of investment bonds with LTCI. A lump sum is invested and regular deductions are made from the funds to finance LTCI premiums. Product design varies and at a certain point, LTCI is triggered and the insurer will begin benefit payments.
Opportunities may also exist for insurers to develop customised products for the residents of retirement villages that offer a full range of care options. These may range from independent living to hostels to full residential care. Progressive cover could be developed to provide extra assistance as required.
The concept of packaging LTCI with other medical coverage to provide a total health care solution is both an attractive and functional one for the retired market.
The immediate care need market
Once a person reaches the stage where they need care there are products available that can provide some solutions. For many the risk at this stage is outliving their available financial resources, making it essential to review their entire portfolio in order to protect their assets and maximise their income. Depending on the state of health, annuities can sometimes be used to provide a measure of certainty. The immediate need annuity, as it is sometimes called, is an impaired life annuity which, in return for a lump sum, offers enhanced returns to reflect a shorter life expectancy.
The preferred solution at this life stage will usually be a combination of products, perhaps annuities and other investments. Equity release products as described earlier may also be an option.
Developing a successful product
As with any product development, focussed market research is essential. Given that LTCI is a relatively expensive product, it is important to evaluate the
relationship between the perception of need and the value proposition. Furthermore, successful product designs will reflect how these perceptions and the relationship between them varies over a lifetime.
The slow withdrawal of Government funding and the trend towards privatising once public services will stimulate market growth. Indeed, our customer base will soon comprise consumers to whom the concept of ‘cradle to grave’ social services will be foreign.
A private LTCI market is unlikely to be the total solution for any government as there will always be a portion of the population who simply cannot afford to buy even the cheapest product, and who will look to the community and public programs for support. Nevertheless, real opportunities exist for the private and public long term care funding systems to co-exist and even co-operate to benefit the wider community. Examples of this are seen in Germany, Japan and some states in America. Interestingly, a private LTCI market evolved in each of these countries well before statutory intervention.
LTCI already has a profile in Australia and New Zealand due to its availability in other markets. This, coupled with the trend toward significant growth of the elderly population and the reduction in the willingness and ability of Governments to provide full services, suggests that opportunities exist here too. Market potential in Australia and New Zealand is relatively untested and the future place of LTCI in a risk protection portfolio is, as yet, unknown. This combination of factors suggests there is room for a creative provider to develop flexible, innovative products capable of integration with existing private and public needs.
Importantly, what other segment of our customer base is growing at such an exponential rate?
Paula Stapleton is manager, Life & Disability Research at Swiss Re Life & Health
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