Impurities

I am a huge, long-time admirer of Ron Hagelman.

In his February, 2016 Broker World Magazine column titled, “Impurities,” Ron compares the long-term care insurance (LTCi) industry’s evolution to that of classic sculpture. Rodin’s painstakingly slow, thoughtful, methodical, reflective chipping away at a plain block of marble resulted in the timeless magnificence of his sculptures.

Similarly, the LTCi industry has also evolved and reacted over many years with thoughtful, holistic tweaks, adjustments and adaptations to its products.

Ron and I are both very hopeful about today’s LTCi products. We like them, they’re effective, they work. I’ve seen hundreds of claims get paid to my policyholders.

Ron cites the 2014 Society of Actuaries LTC Section study “LTC New Business Pricing: How Safe Is It?” as evidence the LTCi industry has learned from experience. Here’s a blog I did about this study. Today’s LTCi products are priced correctly. Rate hikes on today’s policies should be unusual and not of great consequence.

Here is Ron’s column in its entirety:

The inherent beauty of universally recognized “art” is something that is created as a process of elimination.  Michelangelo released David from a solid block of inanimate marble. By methodically chipping away and discarding what was not necessary, something of permanence and exception was revealed. By systematically removing impurities something of transcendent truth may be discovered. The artist involved is actually only a facilitator guided by previous rules of engagement and extensive experience in the pursuit of lasting accomplishment.

Although it may be a stretch to compare the current residue of our grand LTCI experiment to the artistry of Auguste Rodin, it is impossible to ignore our ongoing intention to create something of substance and beauty. Our industry’s dedicated attempt to define and serve a public outcry to diminish the financial and emotional impact of unattended and ill prepared chronic illness risk has certainly represented a historic process of elimination. We have accumulated substantial experience and we have consistently removed the parts that were not working. If it was superfluous, ineffective, overpriced or undersold it has been trimmed away. Our 20-plus year hard headed crusade to expose the reality of the risk and identify a cost effective insurance management tool may be finally beginning to reveal an object of permanence and purpose. Public and private initiatives to reform and improve the market have begun to narrow their focus and solidify around the essentials of future success:

• All the moving parts require attention and some form of structural cooperation between the insurance industry and imbedded governmental support will be required.

• Most claims are fairly small and middle market benefits need to focus on upfront expense and immediate support. By the same token the potential for catastrophic risk must remain at the heart of the individual sale for the more affluent.

• Regulatory reform is now mandatory from the NAIC to state and federal legislatures. This should include greater benefit flexibility and a willingness to consider innovative ideas. Why not allow immediate long term care access to current tax preferred accounts?  Additional tax incentives should also include an enhancement review of existing tax deferrals, premium deductions and credits.

Perhaps the clearest evidence of our ability to remove impurities can be found in the recent research conducted by the SOA’s LTC Section and the ILTCI offering LTCI New Business Pricing: How Safe Is It?  The primary question asked was to identify any differences between past and current pricing stability. I don’t think anyone would argue with the notion that rate increases are the primary scourge of consumer confidence and lackluster sales. The question is: Have we learned from our marketing  mistakes and our growing volume of claims data?  The truth is we have learned from experience.  We do have more information to fine tune pricing assumptions.  We are offering less risky product and the actuaries are using better modeling tools. Rate increases are, of course, the result of the inherent clash of current reality versus the initial assumptions concerning lapse rates, morbidity and mortality. The research team looked at three dates for comparison purposes (2000, 2007 and 2014).  Our current volume of claims experience has taught us that our morbidity experience was somewhat worse than anticipated over time. Our mortality rates are now more conservative, and as you well know our lapse rates are now much more conservative. The companies have learned from each other and  premiums have stabilized with very little difference today in pricing between carriers. The bottom line is we simply have much more information on which to base future assumptions. For example, we are able to evaluate 16 times as much data in 2014 as in 2000 for all policy years and 70 times as much claims information. The reliability of current pricing as it relates to the possibility of future rate increases has increased dramatically over time. In 2000 the chances of future rate increases was about 40 percent, in 2007 it was 30 percent.  However, in 2014 it was only 10 percent. The profitability of the product has also increased—caused by bone on bone lapse assumptions, better understanding of the claim and a low predictable interest rate environment.

We do apparently learn from our mistakes. We can adjust to new realities. We do profit from accumulated sales wisdom. It’s not getting any easier, but it does seem to be emerging from relative chaos into a clear and trustworthy vision sculpted and solidified by experience.  We  have all accumulated our share of marble dust helping to create a transcendent image void of disfiguring impurities. We may yet gaze upon a sculpture that will withstand the test of time.

Other than that I have no opinion on the subject.

Author’s Bio
Ronald R. Hagelman Jr., CLTC, CSA, LTCP
CLTC, CSA, LTCP, has been a teacher, cattle rancher, agent, brokerage general agent, corporate consultant and home office executive. As a consultant he has created numerous individual and group insurance products. A nationally recognized motivational speaker, Hagelman has served on the LIMRA, Society of Actuaries, and ILTCI committees. He is past president of the American Association for Long Term Care Insurance and continues to work with LTCI company advisory boards. He remains a contributing “friend” of the SOA LTCI Section Council and the SOA Future of LTCI committee. Hagelman is president of Broadtower Insurance Solutions, a national IMO helping BGAs enhance LTCI production. Hagelman can be reached at Broadtower Insurance Solutions, Inc., 156 N. Solms Rd., New Braunfels, TX 78132. Telephone: 830-620-4066. Email: rhagelman@broadtowerinsurancesolutions.com. Website: www.BroadtowerInsurance.com.