GE's $15bn LTC reserve charge read-across to sector by analysts
After General Electric (GE) revealed a $15 billion statutory long-term care (LTC) reserve charge over 7 years in January 2018, KBW analysts mull over potential read-throughs to the industry.
Specific factors that likely influenced and exacerbated the size of GE’s reserve charge include a concentration of older policies written from the late 1980s to early 2000s with rich benefits, according to consultants who talked to KBW analysts. It included a reinsurance structure that was probably poorly designed and made it more difficult to monitor and manage claims. Control over premium rate increases was partially dependant on primary writers and not directly controlled by GE while attention to LTC was diminished as part of a very large diversified company.
But despite the GE specific considerations, most consultants KBW spoke to felt there was at least some read-across to the LTC industry over time given the magnitude of GE's reserve charge, but it could take many years if not decades to play out.
Among the most relevant concerns was an improving mortality that is extending claim durations, with the most leverage to lifetime benefits with cost of living adjustments. There is also uncertainty over morbidity trends. Many LTC insurers assume morbidity incidence improves over time in their reserves. There seems to be some historical evidence of this but with many caveats, which makes the assumption of future morbidity improvement highly uncertain, KBW noted. In addition, there is an increasing prevalence of assisted living facilities. LTC claim studies show that policyholders are living longer in assisted living facilities than nursing homes and home health care, lengthening the duration of claims. While KBW analysts suggested that many insurers have been gradually updating reserves for this trend, insurers may not have factored in that assisted living facilities is likely to continue to gain popularity in the future.
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