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 multiple significant LTC reinsurance transactions announced in the last eighteen months, we are seeing a resurgence in (rather creative) third-party reinsurance activity that includes legacy blocks of standalone LTC. A key player in this space is RGA, which, in November 2024, announced a $4B reinsurance transaction, including nearly $2B of legacy standalone LTC.
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.