It is just like your econ professor told you – insurance is nothing but a bet.  It is a bet you often don’t want to win, but in one field you had a great chance of winning simply by hanging around and continuing to breathe.  That field is (or at least was) long-term care coverage.

Two top executives from major insurers told the State Corporation Commission last week just how badly their companies calculated the risk on long-term care decades ago.  They were seeking to explain the major premium increases their companies are seeking here in Virginia and all around the country in a proceeding previewed (here) in March on Bacon’s Rebellion. 

Starting with entirely new product lines 40 years ago, they got interest rate and inflation guarantees wrong.  They assumed that five percent of policy holders would drop every year, as was the case with disability insurance, but it turned out to be more like one half of one percent.  “Everything that could go wrong did go wrong,” said SCC insurance market examiner Bob Grissom.

Once people started collecting the benefits, at home or in a facility, their long-term survival and costs far exceeded projections.  It was 2005 or 2010 before the industry fully realized what was wrong and how much ground had to be made up, leading to earlier rounds of major price hikes.   By then, quite a few customers had filed major claims and received benefits far outstripping their premium payments over time.

The SCC hearing was last week, but the exhibits provided by Genworth Life Insurance and John Hancock Life Insurance were only posted on the case file yesterday.  You can find them here, but they are poor-quality copies and you need to rotate it a half-turn to read them.

The point of the exercise seemed to be explaining to the general public why the SCC is going to have to go along with most or all of these requests.  A room full of interested parties listened that day, including several customers who testified, but only one news outlet attended.  The Word will not really go forth and customer grousing and confusion will likely continue.

These are premium increases on existing policy holders (tracked here). They change the odds on the bet for policy holders who have yet to file a claim. Prices and benefits have really changed for those now seeking this coverage for the first time.  John Hancock Life Insurance doesn’t even offer it anymore.  While the SCC staff reported 16 insurers remain in the market, the Genworth Life Insurance official said his count was 12 with only six writing new policies.

While the SCC staff was testifying about how it reviews these requests and the company finances, Commissioner Mark Christie asked several questions about profit margins and the percentage of revenue dedicated to claims.  Staff replied that second measure, the loss ratio, is reviewed but not the direct profit.  One goal of the review is to prevent new premium dollars from covering previous losses.

But Thomas J. McInerney, the president and CEO of Genworth, later sought to shoot all that down during his time on the stand.   “I wish we could have positive (returns) at Genworth,” he said.  Instead the company has lost $3.6 billion on it four oldest long-term care products, recently losing $425 million per year, and is down to a $1.9 billion reserve.

Even with these requested premium increases, the various policy lines will be paying out more than they take in.  The Henrico-based Genworth is the largest company in this arena, with 1.1 million policies around the U.S. and 42,000 in Virginia.

David Plumb, John Hancock’s vice president for long-term care pricing, testified the price increases it seeks will return their policies to loss ratios in the 90 percent range.  He walked through some of the options it has used with existing customers to either lower benefits while maintaining premiums or change some of the inflation guarantees that proved so unrealistic.

Many policy holders were offered a fixed-benefit option where they drop their full benefits, stop making payments, but are guaranteed payments when needed equal to their previous premium payments.  Despite those innovations, accepted by many customers, he warned of “severe adverse consequences if rate increases are not approved in a timely manner.”

Both McInerney and Plumb assured the commissioners that they are not using Virginia premium dollars to subsidize coverage in other states, but the lack of consistent policy between the states is a major issue going forward.

That was the focus of an exchange between McInerney and Christie, with Christie complaining that inaction or denials in other states were putting economic strain on the system and at least indirectly harming Virginians.  He pointed to California and New York, saying the have elected their regulatory bodies and “I think its political.”

“I agree with everything you just said,” McInerney responded, but he noted that New York is such an outlier that most companies wall that off within a subsidiary, isolating the losses.  He said 40 to 45 states are responsible actors, if not granting everything sought in the way of rate hikes, “and in those (other) five or ten states we have discontinued writing policies.”

Virginia’s insurance commissioner, Scott White, is the chairman of a national task force that has brought 30 state regulatory agencies together to see if there are some general, common steps to stabilize the situation and bring in more underwriters going forward.  Previous efforts have been “frankly unsuccessful,” he told the commissioners.