The ground is rapidly crumbling under the long-term care insurance industry. Genworth Financial, a major LTC player, has been caught in the avalanche.

Genworth recently posted a quarterly loss of $844 million, driven in large part by costs associated with its LTC products, according to Bloomberg. (1) The loss was the largest since Genworth was spun off from its parent company, General Electric, in 2004.

Genworth CEO Tom McInerney said in a statement: “Change in this business will be more difficult and protracted.” (1) But doubling down on long-term care coverage, of which Genworth is the largest provider, will ultimately be a losing proposition, not just a challenging one.

This is because the reasons Genworth’s policies were priced too low in the first place have not changed today and are unlikely to change in the future; in some respects, the problems may become more acute. People are living longer than ever before, on average, and need a higher standard of care as they age. This means that costs will continue to rise.

In a call with analysts, Genworth management responded to a question about whether it should put long-term care insurance on “discontinuation” — that is, wind down the business by halting sales of new policies.

The response was that Genworth considered exiting its LTC insurance business, but decided to hold out because state regulators are likely to approve rate increases on previously sold coverage. The company stopped selling policies in the states that refused to approve higher rates: Massachusetts, New Hampshire and Vermont. The other 47 states had reached agreements with Genworth by the end of October.

This decision implicitly admits that even recently sold policies are still likely to be undervalued. Insurers have consistently underestimated how quickly costs of care will rise and how many customers will buy and use their LTC policies. And Genworth’s decision also misses the main issue of adverse selection: As premiums rise, healthier customers, who are less likely to need expensive benefits, have stronger incentives to cancel their policies, leaving to the insurer with only the sickest and most expensive part of the policy. risk pool

The other argument in favor of staying in the long-term care market is that low interest rates have resulted in lower-than-expected returns on invested premiums. This observation is true. But it’s also an issue that affects all types of insurance, not just long-term care products. Yet only a dozen companies sell significant numbers of LTC policies these days, compared to more than 100 companies a decade ago. Those remaining companies have raised prices and denied coverage to about one in five individual applicants.

Genworth shares fell 37 percent the day after announcing its financial results, and the company’s bonds are at risk of being downgraded to below-investment-grade (generally known as “junk”) status at Moody’s. “We believe the company remains exposed to further and significant deterioration in its legacy block of businesses,” Moody’s said. (2)

Genworth argues that LTC insurance is a product that the market needs. This is false. LTC insurance is fundamentally an unsustainable product that cannot work in the long term, precisely because so many people tend to make claims against it.

What the market needs is a solution to the problem of how to affordably care for an aging population. LTC insurance does nothing to this end, although states like it because state regulators want to shift costs away from Medicare and Medicaid. Doing so only moves those costs, not reduces them.

What we really need are more cost-effective ways of caring for people, ideally at home, whenever possible. An army of people, mostly from outside the country, is available for this job, but we have not provided any effective mechanism to bring those people here. And increasingly, various rules make it difficult for a family to hire domestic workers. This trend forces older Americans and their loved ones to use in-home help agencies, which are often more expensive than hiring help directly. However, in many more cases, it forces them to institutionalize people who could actually stay at home if help were available, further raising the costs of care.

LTC insurance is proving that it is not a solution. It’s not even a viable product. As it gradually fails, perhaps we turn our attention to the real problem.

Sources:

1) Bloomberg, “Genworth Drops After Record Loss; CEO Apologizes”

2) Bloomberg, “Genworth Bonds Risk Junk Based On Moody’s Review Rating”