A lot of people made the wrong bet on long-term care and now they're paying dearly.
The Wall Street Journal reports two Pennsylvania insurers are failing due to long-term care claims they can't pay. Their actuarial calculations in past decades were fatally flawed on a number of fronts and now nearly 80,000 policyholders are left hoping for the best.
The two companies, both of which are divisions of Penn Treaty American Corp., have agreed after years of legal battles with state regulators to liquidate their $600 million of assets in the face of more than $4 billion of liabilities that they won't be able to pay.
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Policyholders will likely retain coverage through a guarantee association funded by assessments on other insurers. In most states, their claims will be capped at $300,000, however.
In 1990, as long-term care policies were starting to hit the market, actuaries anticipated that the average male beneficiary would live for 18 years after age 65. It actual life expectancy turned out to be 21.7 years.
Similarly, actuaries guessed that about 5 percent of policyholders a year cancel their plans before making any claims. The actual percentage who did that was typically less than 1 percent per year.
Finally, insurers predicted that they would make much more by investing their premium revenue. In 1990 and then again in 2000, towards the end of the dot com boom, insurers anticipated making 7 percent profit a year on their invested premiums. After the devastation of the Great Recession and a recovery characterized by slow economic growth, the average profit turned out to only be about 3 percent per year.
While some long-term care insurers have saved themselves by jacking up premiums on their beneficiaries, others have been blocked from doing so by state regulators.
As a result, the industry has fled the long-term care business, leaving that product in the hands of a relatively small group of insurers at a time when the need for elderly care has never been greater.
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