SJP's protection expert, Tony Müdd, writes that despite the opinions of so-called 'industry experts', that the creation of a Long Term Care Insurance product is feasible although not necessarily an easy endeavour.
Since Andrew Dilnot as far back as 2011 observed that the cost of care represented "…. the last big uninsured risk" the Government have been keen to encourage the industry to a develop a Long Term Care Insurance (LTCI) market.
While the development of such a market will clearly not introduce immediate funds into the provision of care, it could provide substantial injections of funds for the next generation who arguably will have an even bigger problem in years to come than the crisis we are currently facing.
Despite his comments, Dilnot did also identify the reasons why a private insurance market for care costs did not exist, namely:
- Most people assume that the state would be there in their hour of need.
- That it was hard for product providers to design products when it is unclear what the state will provide, and
- Insurers will be wary of exposing themselves to extreme ‘tail' costs.
Roll forward a decade and while we are no nearer the development of LTCI in the UK the Government remain very keen for the industry to step up with a solution.
No doubt more hopeful now, given that in their view, two of the above points have been dealt with.
People are more aware that the state will not necessarily be there because social care is means tested. And following the Health and Social Care paper there is greater clarity over, what the state will provide.
It should not be a surprise therefore, that the Government have commissioned a paper on the viability of LTCI in the UK based upon the changes that will be introduced: the increased means test and the £86,000 cap.
‘Industry Experts', unnamed, have now given their views and the results will surprise very few.
Voluntary insurance findings
The Government asked ‘experts' to look at the likely cost of the product and a view on the likely behaviour of the insurance companies and policy holders (it's interesting to note that they were not asked to comment on distributors).
The parameters of the product envisaged by the Government, upon which these ‘experts' were asked to pontificate were:
- A regular monthly insurance product targeted at individuals aged 40 with premiums payable until age 65, with
- Benefits payable in the event of a claim up to the cap and limited to the cost of care incurred at the rate paid by the relevant local authority.
To be honest, when I first saw these parameters I laughed, however, the ‘experts' were a little bit more constructive with their response, even if ultimately it amounted to the same view.
A summary of their observations being:
- It would be exceptionally difficult to supply the benefit payable under the policy and could potentially involve significant financial risks for the insurer.
- The product itself will be complex and almost certainly incapable of providing full indemnity against the cost of care up to the cap plus could involve reputational risk to providers.
- In order to offer an insurance product in line with the cap and floor model, insurers would require a large amount of certainty with regards to future Government policy. Retrospective changes could leave the policy holder uninsured, and the insurer open to criticism.
- Pricing would be difficult either for a capped or uncapped amount without reliable data on the probability of needing care. Insurers have no experience of this type of risk and such experience would be unlikely to emerge for thirty or more years.
- Initial views based on assumptions around insurer margins, interest rates and increases in the level of the cap indicated that premiums will be in the order of £250-£300 per month and only those in the highest income brackets would be able to afford premiums at this level.
- It was also their view that there was the potential for perceived poor value for money, highly topical given PS21/5 and Consumer Duty.
I would not disagree with any of these experts' opinions…based on the questions that they were asked. The point is they were asked the wrong questions.
Who said it was necessary to design a policy based on some form of indemnity? Why would you even try to design a form of indemnity insurance when you have almost no chance of correctly calculating the level of indemnity?
Why would you design a policy that will only be marketed to individuals who will be self-funders or at least individuals who want to pay for a higher level of care than that supplied by the local authority but link the sum assured to the local authority rate of care costs?
Will manufactures or distributors ever get comfortable selling a product linked to local authority care rates (there are 152 different local authorities) that will only cover the minority of total care costs?
I could go on…
Can LTCI viable products be created?
Yes and, with all due respect, if the Government had asked or even involved distributors in the conversation (after all, we know our clients best) they would have got a very different answer.
What we need is a policy that is simple and that customers can understand. A policy that does not involve prudential and reputational risk for providers. A policy that doesn't expose them to tail risk costs and the level of capital that this ties up.
In short, a simple Whole of Life policy that pays a lump sum, determined primarily around affordability, on the failure of three but preferably two ADLs.
With the average costs of an Immediate Needs Annuity (INA) at £100-£120,000 a sum assured of £150,000 should be ample for the vast majority of customers.
The real problem
The real problem is not actually the design of a policy. As any adviser will tell you, it is about creating a need. Without demand, no adviser, however good he or she is, will be able to sell a protection policy and an LTCI is no different.
Right now, the demand is, at best, limited and even though people are beginning to understand implications of social care costs they are also being told that the maximum extent of their personal contribution is £86,000.
As keen as the Government are to see LTCI products developed, I don't see them being keen enough to come clean with the public that it is only really £86,000 if you look like this.
If you fall into this narrow category and are happy to let their local authority decide when, where and what type of care you will receive.
Only when this changes or when the public become aware through experience or education, will LTCI be anything like viable.
Tony Müdd is divisional director, development & technical consultancy for St. James' Place Wealth Management.
