Getting the Hybrids on the Road.

• Author: Laudato, Tony
• Position: [GUEST ARTICLE]

The continued decline of standalone long-term care policies seems inevitable, and the life insurance gap among Americans continues to widen. Hybrid policies offer an obvious solution, and are becoming increasingly popular--but the right approach will be needed for insurers to fully cast off their skepticism

Recent months have seen a steady drip of bad news from life insurers, as firms have had to boost their reserves to the tune of billions in an expectation of soaring payouts for long-term care policies. October's update from Unum followed to tune of Prudential's in August, and by the time this is published more will likely have followed.

While troubling, the news simply confirms something that sums have made fairly obvious for some time: the old long-term care market--once so popular as a means of funding assisting living, nursing home and home care services --is now more of a headache than an opportunity for insurers.

The market is now having to significantly review assumptions made long ago when the first such policies were written, during a period when interest rates and projected lapse rates were higher and health care expenses lower. The to say the equation has shifted would be an understatement--healthcare costs for assisting living have almost doubled over the last fifteen years, while one in two Americans now suffers from chronic illness.

The accompanying increased premiums have decimated the industry. Many providers have withdrawn from the line altogether, and those that remain are having to be increasingly restrictive with their policies.

Axing an entire revenue stream, however--especially one that was once so lucrative--is a risky choice to make in a situation where demand is clearly not the problem. The need for long term care is going nowhere.

As such, the market is increasingly starting to turn to hybrid policies. Hybrid policies work by combining the two types of coverage--life insurance and long-term care- and allow for payouts based on accelerated or early payments of a death benefit. Importantly, the combination also allows insurers to stabilise the risk profile of the product, and provide a sustainable means of growing both the top and bottom line.

These policies are designed to make long-term health care insurance profitable again, and in doing they may also present a way to partially tackle another problem--the decline in the life insurance market. The number of Americans holding life insurance has been falling...