For anyone holding a long-term-care insurance policy, new allegations of financial trouble at one insurer may make you wonder what would happen to your policy if your underwriter went belly up.
While insurance companies have been bolstering their reserves to cover future claims and raising premiums to counteract inaccurate pricing when the policies were first sold, experts say policyholders shouldn't worry.
"Insurance carriers are heavily regulated by the states to make sure they are financially solvent and can pay claims," said Scott White, Virginia's insurance commissioner and chair of a national task force on long-term-care insurance.
On Thursday, an accounting expert released a report alleging that GE has fudged its financial statements to mask mounting troubles, a claim the company adamantly denies. Part of the report zeros in on GE's long-term care business unit, which the author says is experiencing huge losses that will only get worse as policyholders age.
Earlier this year, GE announced its intent to impose $1.7 billion in premium increases, through 2029, for its 274,000 long-term-care insurance policyholders, whose average age is 77. Those policies, which originated with other carriers, have been on GE's books for more than a decade.
Regardless of the merits of the allegations in the report, it's no secret that the long-term care insurance market has been struggling due partly to an aging population whose claims against their policies have exceeded cost expectations. Low interest rates over many years have also meant lower-than-expected investment returns for the carriers.
Additionally, over the last 15 years, the cost of various types of long-term care — which is help with daily living activities like eating and dressing — has increased 19% to 67%, according to Genworth Financial. The annual median cost of care now ranges from $18,720 for adult day-care services to $100,375 for a private room in a nursing home.
Since about 2012, sales of long-term-care policies have been skidding. At that point there were about 233,000 buyers that accounted for $550 million in premiums, according to data from LIMRA, an insurance industry association. By 2017, there were 66,000 buyers who paid $176 million in premiums.
Insurance companies of all stripes are required to have a certain level of reserve funds dedicated to paying claims for their products. Exactly how much is required depends on the state and how they allow insurers to calculate those amounts.
For long-term care insurers, getting that number right is proving to be a tricky calculus.
Last year, at least several carriers announced that they had to add large amounts to their reserves. GE announced it would move a whopping $15 billion — later revised to $14.5 billion — over seven years; Prudential Financial said it was adding $1.5 billion to its reserves, and Genworth Financial, $400 million to $450 million.
Nevertheless, even if an insurer were to reach the point where it was struggling to pay claims, state regulators would step in. And, each state has a guaranty fund, which essentially is supported by the other carriers in the state so that policyholders' claims are paid.
"If a company is unable to pay claims, the state has the ability to place the carrier in receivership," White said. "Worst-case scenario, if insolvency leads to liquidation, it triggers the guaranty fund."
However, each state's fund is different.
"There are some limits with those funds," said Jesse Slome, executive director of the American Association for Long-Term Care Insurance. "They might cap benefits, so you should check what your state's limits are."
Regardless, he said, "consumers really don't need to worry."
— CNBC's John Schoen and Crystal Mercedes contributed to this report.
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