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Monday, July 11, 2005 - Page updated at 12:00 AM

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Growing Older

Why long-term-care insurance rates are rising

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Liz Taylor's six-part series on long-term-care insurance: www.seattletimes.com/growingolder

In the muddle of my Christmas mail nearly two years ago, I received notice from my long-term-care insurance company

that my premium was going up — the second time in three years, for a whopping total of 78 percent.

Egg dropped off my face as I thought of the six-part series on long-term-care insurance I'd written for The Seattle Times the previous summer. Described by many as one of the most readable accounts they'd ever seen on this exceedingly difficult topic, I had been wrong on one critical element: cost.

In Part 5, I'd written: "Does this mean your annual premiums will never increase? No. In Washington state, which has tough long-term-care insurance regulations, a company can increase its rates only if it proves to the state insurance commissioner that it's necessary. ... I expect my policy to cost a little more over the next 30 years, but not astronomically more."

Well, a 78 percent premium increase is definitely "astronomical." I've heard from readers with similar problems, not just with my carrier but several others. So let's look at the issues.

Long-term-care insurance is a young industry — the first policy was introduced in the 1960s by CNA — with a short learning curve. Many factors account for what's now become an almost "perfect storm."

First, more of us are using our benefits than anticipated — not just because we're living longer but because the industry's first policies took a page from Medicare and covered nursing homes only (mainly because only nursing homes existed then). Although early policies were inexpensive, many policyholders — not understanding their limited coverage when they bought them — didn't make wide use of their benefits, and large numbers dropped their coverage altogether.

Second, in the 1980s and early 1990s, a variety of alternatives to nursing homes blossomed, and competition among insurance carriers increased, most adding a wide range of care options to new policies — with only modest price increases. Policyholders, now with access to home care, assisted-living facilities and adult-family homes, used their benefits more often and longer than in the past.

Then, in the late '90s came rate adjustments, sometimes with a vengeance.

"Some carriers priced their products too low in the first place," says Ken Story, a long-term-care insurance specialist with the Gjurasic/Story Group in Seattle and my main consultant on the earlier series, "while others didn't anticipate the extraordinarily high rate of policy renewals."

Then a third problem arose: The carrier's return on investment income (to pay future claims) plunged.

Background: Washington state has some of the toughest long-term-care regulations in the nation. Watching both sides of the ledger, our state allows carriers to increase their rates if they can prove they're necessary, while also ensuring a "reasonable" return to make sure they don't charge too little and go belly-up.

To do business here, long-term-care insurance carriers must estimate how much money they'll need to pay future claims, then invest these funds — by law — mainly in bonds, which are inherently conservative and interest sensitive.

Remember those low interest rates that have dazzled homeowners in recent years? Well, they've been disastrous for bondholders. Long-term-care insurance reserves didn't grow as expected. They had three options: raise rates on all customers, raise rates only on new customers, or raise capital by selling stock to bolster their reserves. My carrier did all three. Some left the industry altogether.

In 1997, Consumer Reports rated my policy the best long-term-care insurance policy in the United States — out of 127. It's still the best policy I've ever seen, and the company, Penn Treaty, is working hard to overcome past problems.

Among other things, it bought a "reinsurance policy" for itself that covers all customers who bought a policy before 2003, assuring that all claims will be met no matter what happens to the parent company.

Other companies had similar large rate increases: Bankers Life & Casualty, Travelers, Conseco, Life Investors and Transamerica.

CNA, the old industry war horse, didn't raise rates for 30 years. Then, in 2003, it stopped selling to individuals and increased rates by 50 percent to all existing individual policyholders. For people late in life on fixed incomes, CNA's behavior was unconscionable.

Some companies have never raised their rates on existing customers in our state (although they've raised them for new customers), among them: GenWorth (formerly GE Capital, previously Amex), MetLife, John Hancock, Allianz and Lincoln Benefits (owned by Allstate). Does that guarantee they never will? No.

"Long-term-care insurance isn't like home or car insurance," says Beth Berendt, deputy commissioner for rates and forms with the Washington Insurance Commissioner's Office. When a homeowner gets a huge rate increase on his house insurance, he just shops around until he finds a better buy. But with long-term-care insurance, he might have become ineligible for a different policy because of age or illness.

Thus, the stakes are high. Next week, I'll bring you more issues to sort in this complex juggling act, including what happens if your long-term-care insurance company leaves the market or goes belly-up.

Liz Taylor's column runs Mondays in the Northwest Life section. E-mail her at growingolder@seattletimes.com or write to P.O. Box 11601, Bainbridge Island, WA 98110. You can see all of her columns at www.seattletimes.com/growingolder.

Copyright © 2005 The Seattle Times Company

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