"Exposure to the long-term care market remains a plague," says Anthony Beato, Director of Insurance at Fitch Ratings. "It continues to be a risky product despite the adoption of more conservative reserving philosophies that more closely align to its volatile liabilities."
LTC policies are among the riskiest for insurers because of their volatile performance, high reserve and statutory capital requirements, and heightened exposure to interest-rate-related risks, which all have the potential to introduce volatility in company capital and earnings for years after they are issued.
Although many insurers are strengthening their reserves and right-sizing aggressive assumptions, often these actions are at executives' discretion. In addition, reserve and financial reporting standards are inconsistent, despite regulators' attempts at guidance and clarification. State-level regulations can exacerbate uncertainty because of regulators' discretion to approve annual rate increases and the wide variability in timing to do so.
"Regulation has not been the panacea everyone has hoped for," says Mr. Beato. "Often regulators have to strike a delicate balance between insurer solvency and consumer protections."
Fitch's analysis identifies four insurers with very high exposure to the LTC market and below average reserve adequacy. They include Genworth Financial, General Electric, UNUM Group and Senior Health Insurance Co. of PA. AEGON Americas has moderate exposure but below average reserve adequacy.
The full report, "U.S. Long-Term Care Update: Legacy Exposures Continue to Plague Insurers," is available at www.fitchratings.com.