A year ago May I wrote an article about long-term care insurance focusing on five companies with the greatest market share. Out in front with a commanding lead was CNA Financial (NYSE:CNA) with 41%. With a poor economy, long-term care insurance hasn't been a priority for many consumers this past year. Nonetheless, long-term care insurance sales in the first six months of 2010 have actually been quite positive, up 13% year-over-year. In addition, the top five carriers saw new premiums rise 26%, and although the economy continues to put a drag on premium generation, demographics and a healthier financial picture will be a boon to insurance companies. I'll look at what you can expect from some of the players in the future.
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Cost of Care Rising
Insurance is a product we don't generally buy, but are sold. Nobody likes to pay premiums for something they'd rather not think about. However, it's really not something to postpone. Genworth's 2010 Cost of Care Survey reports that the annual median cost of a private room in 2010 was $75,190, a $15,000 increase from 2005. Interestingly, while the cost of care in nursing homes and other facilities has risen quite dramatically, the cost of "unskilled" home care has remained flat. Thus, there is a temptation to believe home care will be enough. It probably won't.

Manulife's John Hancock division recently announced it was increasing premiums on in-force long-term care policies by 40% and suspending the sale of group policies until it can fully understand the current claim patterns. It's become readily apparent that more people are making claims than anticipated and when they do, they're lasting longer, creating a pricing problem.

Demographics Don't Lie
Depending on whom you ask, the baby boomer population in this country is between 76 million and 80 million people with the first boomer's turning 65 in 2011. It's an aging population that at some time in the future is going to need long-term care. Who will pay for and provide this care is the million-dollar question. Many experts suggest buying long-term care insurance at age 50 when premiums are cheaper and you're more likely to qualify building a sufficient amount of protection when you need it in your 80s. According to John Hancock's latest findings, policyholders over the age of 80 have been making claims at four times the rate in 2006. I can't see this changing anytime soon.

While rate hikes like John Hancock's have a tendency to reduce sales of long-term care insurance in the near-term, the reality is that insurance companies must be able to understand the claims history before it can provide stable premiums. Until then, consumers can expect rate increases greater than inflation. In the first six months of 2010, the average first year premium for long-term care insurance was $2,174. As more boomer's turn 65, it should become clear to their children that buying insurance earlier makes sense in most cases except where it's a certainty they'll be able to afford the care out-of-pocket.

Top Long-Term Care Insurance Providers - Stock Performance YTD

Company YTD Total Return
Genworth Financial (NYSE:GNW) 15.2%
Manulife Financial (NYSE:MFC) (30.7%)
MetLife (NYSE:MET) 12.1%
Prudential Financial (NYSE:PRU) 8.9%
Aegon N.V. (NYSE:AEG) (0.2%)
CNA Financial (NYSE:CNA) 17.9%
As of 10/15/2010

Winners and Losers
On the surface, Manulife appears to be the clear loser in this rapidly changing market. At the end of the third quarter it announced a $700 million expected charge for larger than expected insurance claims. Some suggest it could be as high as a billion dollars or more. Manulife currently pays $1.5 million a day on claims. Combine this with an expected sales slowdown next spring when rates jump by 40% and things aren't looking very promising. However, this is an industry-wide problem that will see other companies making similar moves. The big question is how long it will take them to get a handle on morbidity rates so that they can price the product appropriately.

Bottom Line
A.M. Best, the ratings service for the insurance industry, continues to hold a pessimistic view of long-term care insurance, and to a certain extent who can blame them. This is a business in flux. It seems the leading players are constantly changing, making it difficult to handicap. Add to this state regulators who complicate matters by dragging their feet when approving rate increase requests and you have a recipe for disaster. However, it seems to me that the companies that hang tough - Manulife, Genworth, MetLife - and stay the course will reap huge benefits as the youngest boomer's like myself start buying long-term care insurance. It's inevitable. (For more, see A New Approach To Long-Term Care Insurance.)

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