Financial
  • Articles
  • May 2025

Reinsurance Resurgence: State of the long-term care industry

An interview with RGA’s Bruce Stahl

Elderly woman getting care from a nurse
In Brief
In this article, originally published in the Oliver Wyman Long-Term Care Lowdown newsletter, RGA’s Bruce Stahl discusses his view on the evolution of the LTC reinsurance market, including how industry experts are navigating complex factors such as policy characteristics, capital requirements, and investment strategies to balance risks and opportunities in this specialized sector.

Key takeaways

  • The long-term care (LTC) reinsurance market is experiencing a resurgence, with growing demand for risk transfer solutions, but transactions are developing cautiously due to the complexity and expertise required to manage LTC risks effectively.
  • Premium rate increases, required capital, and investment strategies are critical factors in LTC reinsurance transactions, with each presenting unique challenges and opportunities for both buyers and sellers in the market.
  • The future of LTC risk transfer volume depends on the development of alternative capital arrangements and the appetite of investors, with potential for growth as reinsurers and insurers find new ways to manage complex liabilities.

 

Reprinted with permission from the Oliver Wyman Long-Term Care Lowdown newsletter.

With us today is Bruce Stahl, who leads RGA’s US Individual Health business. Bruce kindly agreed to share his views on the state of the LTC reinsurance market for the LTC Lowdown. Please enjoy our discussion with Bruce below.

With a few recent and sizeable LTC reinsurance transactions in our rearview mirror, what’s your take on the current LTC risk transfer landscape?

Recent LTC transactions, including those by RGA, represent only a small fraction of the total LTC liabilities held by direct companies. Demand is growing for risk transfer solutions to diversify capital and, in some cases, demonstrate the reasonableness of reserves.

Of course, LTC reinsurance is complex and requires significant expertise and resources to assess and properly manage, so I expect transactions to develop cautiously. Specific areas to watch include premium rate increases, required capital, and investments.

Premium rate increases

The history and expectations of premium rate increases can be contentious when negotiating an LTC reinsurance transaction. For the assuming company, “the buyer,” the history of rate increases on blocks of policies issued in the 90s brings into question whether the rate increase choices allowed for adverse selection and therefore higher eventual morbidity than otherwise might have been expected. For blocks of policies issued later, the cumulative size of the premium rate increases generally has not been as large, and a greater concern to the buyer may be whether further planned premium rate increases are likely to be approved, and if approved, to what degree.

Required capital

Those insurers seeking to cede their LTC risk, “the sellers,” have a range of motivations, including capital. Many are concerned about overexposure to LTC or the risk of failing to achieve an adequate return on current or future required capital. Buyers face the same challenges, but with one key difference: They can refresh the economics with their own levels of capital and views on the business at the transaction’s effective date.

Some insurers may focus on statutory capital requirements, others on S&P, and others on their own calculation of required capital, which can be based on an actuarially derived amount. These differences may provide room for the seller and buyer to negotiate a price. The two parties may also have different return targets.

Capital is designed to protect against a specific level of future adverse experience. The ability to do so through premium rate increases may allow the assuming company to reduce the capital level, increasing it gradually as the projected future premium run-rate declines. (The smaller the future premiums, the lesser the ability to mitigate adverse experience through premium rate increases.) For blocks of policies issued before the turn of the century, the anticipated future premium run-rate is small, and the required capital on any basis is likely high.

The required capital may also differ between the buyer and the seller based on their product portfolios. Required capital may be lower for insurers with other product lines, such as life insurance, that offset the LTC risks.

Investments

While LTC brings a higher proportion of actuarial risks than some blocks of asset-intensive business, the illiquid and long-term nature of LTC liabilities requires that the investment strategy is a key element of any reinsurance value proposition. Blocks of older policies have shorter remaining cash flows, while blocks of newer policies have longer duration. Buyer preferences on shorter vs. longer blocks determine how appetite and capabilities on the investment side balance out differences in underlying product risk on the liability side.

RGA has deep expertise in medical advancements and their impact on longevity. Discover how we help clients future-proof their insurance products to account for changes in medical practices and treatments, particularly for seniors.

Have you observed any movement in the “bid-ask spread” between carriers interested in reducing their LTC exposure and reinsurers seeking to provide them with solutions? What would you say are some of the drivers of this movement?

“Bid-ask spread” has limited LTC reinsurance transactions for years. Potential buyers historically have held more conservative views than sellers, which constrained the market. Over time, insurers have increased their reserves and implemented premium rate increases in response to emerging experience, making bid-ask spreads much narrower than a decade ago. Further, as blocks mature and experience continues to accumulate, confidence in outcomes also has steadily increased. That said, investors willing to assume LTC risk need to ensure appropriate returns on capital and are not under significant competitive pressure to transact.

We understand that not all LTC in-force blocks are created and managed equally, and we have a two-parter question for you in this vein. Can you share your thoughts on what block characteristics might be viewed favorably and more conducive to a reinsurance transaction?

Policy blocks with benefits that misalign the interests of the policyholder and the insurer are of particular concern. For example, policyholders with unlimited lifetime benefits have no incentive to minimize their use of LTC services.

Many investors and insurers are especially wary of policies with automatic increasing benefits that exceed cost of care inflation. I do not think these represent a greater misalignment of interests than other benefit options. Though inflation in LTC services has been high following the COVID-19 pandemic, generally the actual cost of services inflates in correlation with interest rates. If investments are managed accordingly, higher investment yields can offset a portion of the higher inflation.

We’ve observed somewhat of a dichotomy among reinsurer preferences regarding block vintages (e.g., older vs. newer vintages). What are your thoughts on this?

While I am not fully aware of the competition’s preferences, RGA is primarily interested in newer vintages of LTC policies, which aligns with our in-force. We believe this gives us a somewhat unique positioning. We recognize in our capital the opportunity to create value from further modest premium rate increases. We also recognize that the more recently issued business had been originally priced with projection assumptions closer to what was becoming reality, that the underwriting was being applied more consistently within each insurer, and that the policy language tended to be more tightly written.

Those who favor the older vintages apparently prefer knowing how the actual experience of the business has developed.

Let’s close this out with a prediction, so get out your crystal ball! How do you think the LTC risk transfer volume over the next few years will compare with what we have recently observed?

I hope that as both reinsurers and insurers identify and implement new ways to apply alternative capital arrangements for complex liabilities, more in-force LTC transactions will take place. Much will depend upon the appetites of the investors for both the buyers and the sellers and the confidence in their ability to manage the business.


More Like This...

Meet the Authors & Experts

BRUCE STAHL
Author
Bruce Stahl
Senior Vice President and Head of US Individual Health