Long-term survival

Following several high-profile market withdrawals in recent months, the demise of long-term care insurance appears to be imminent. Mike Williams discusses whether long-term care has a future and what that future looks like

As probably the smallest - but not the lowest profile - health product, the future of long-term care insurance is in doubt following several high-profile withdrawals in recent months. The need for long-term care funding seems compelling, especially once it is realised the average cost of residential care in England is £340 a week, rising to £472 for nursing care, according to Laing & Buisson. Worse still, costs can exceed £1000 a week in more specialist units for elderly mentally infirm patients. Public funding is available, but only once assets have been substantially depleted.

Given the sums involved, it is perhaps not surprising that insurance or funding costs are also high. Of the options available, pre-funding by paying regular premiums from a (relatively) young age is the most sensible - at least on the face of it. However, this form of pre-funding has declined in popularity during recent years and has been overtaken by single premium policies since 1996 (see chart below).

Single policies

Despite having declined from their peak in 1996, single premium pre-funded policies, including bonds, still account for about one-third of long-term care sales. Costs are considerably lower than immediate needs policies, particularly if purchased at younger ages, as the fund has had time to appreciate and there is always the chance that it will not be required.

The strongest growth in recent years, however, has come from a single premium point of need or immediate-need policies. Essentially a level or escalating annuity, these are taken out - as the name implies - as and when care is required, and they contribute to the cost of care, usually until death. The primary risk is the length of time for which a patient will require care. Although the average stay in a home may only be a few years, it can obviously be shorter or longer.

In broad terms, data compiled by the Association of British Insurers indicates that the market, by new policy numbers, splits evenly into thirds.

But the scenario is different in new premium terms. Regular premium pre-funded policies accounted for just over £2m in 2002 and pre-funded single premium policies (including bonds) accounted for nearly £34m. However, it is single premium point-of-need policies that took the largest share with more than £72m.

Overall this is a small-scale market. ABI figures show a total of less than 1800 regular and just over 3000 single premium policies sold in 2002.

Compare that to over one million critical illness policies and 245,000 individual income-protection policies sold in the same year and the scale of the problem becomes clear. In a 21st-century insurance market where consolidation, scale of operation and efficiency are watchwords, long-term care is difficult to accommodate, particularly as significant underwriting is required.

So why is it not a bigger market? The hard facts, as witnessed by the emerging dominance of point-of-need policies, are that younger people have other priorities, do not like to contemplate severe incapacity or dependence on others and tend to assume the state will provide. The nature of claims admission can also be problematic, based on assessment of performance against a number of activities of daily living, comprising dressing, feeding, mobility, washing, toileting, transferring or qualifying mental impairment.

There are also differing views as to the future health of the elderly.

At one extreme, the pessimists would have us believe that medical and surgical interventions will allow increasing numbers of unfit people to survive, enduring degenerative or chronic diseases with consequent care requirements. The optimistic outlook is that the adoption of healthier lifestyles and scientific advances will lead to a compressed period of ill-health preceding death.

Given this uncertainty, and the fact that robust claims experience will take time to emerge, along with factors such as scale, it is perhaps not surprising that the market is viewed as increasingly unattractive. Both Norwich Union and Lifetime Care (Axa) withdrew from pre-funded long-term care in 2003 and were followed this year by Scottish Widows. Bupa adopted a converse position, withdrawing from point-of-need policies, but maintaining its pre-funded offering.

Ageing population

It is tempting to dismiss long-term care as a market with no future, but this may prove premature. An ageing population, potentially enjoying increasing longevity and supported by a relatively smaller workforce, is likely to increase the pressure for self-provision in the future.

This, however, is not the only lens on the future. There are opportunities for long-term care as an adjunct to, or an element of, other products.

The rise in home ownership has created an asset-rich but ageing generation to whom equity release will become an increasingly important financial management mechanism. Linking long-term care into this is possible now, allowing an ordered transition from independence to care at the requisite time. Alternative futures may take the form of a tangible link to pensions, as part of retirement planning, or an extension of income protection into 'expenditure protection' in retirement.

One thing that does seem certain, on the basis of the demographic trends and costs of care, is that there will be a growing need to fund long-term care - it is just that the need is not sufficiently appreciated, nor the solutions sufficiently attractive at the moment.

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