What’s in the news at INN

What’s in the news on InsuranceNewsNet.com

The perils of LTC insurance, the return of the DOL Fiduciary rule, and Medicare drug price negotiations.

[Editor’s Note: These are some of the major stories to which we are devoting ongoing coverage on InsuranceNewsNet.com.]

Where did LTC insurance go wrong?

by John Hilton

The tale of long-term care insurance is a story full of flags that went red — at least two, in particular.

Jesse Slome frames the two problems as logical assumptions that did not go as the industry had planned. As a result, the struggles with LTCi policy blocks continue, with insurers seeking controversial rate hikes one after another.

Slome is the executive director of the American Association for Long-Term Care Insurance. The two assumptions are the changing dynamics of long-term care and the policy lapse rates.

LTCi began as nursing home care insurance in the 1970s and “was a very simple product,” Slome recalled. “You priced it. You sold it to elderly people. And if they went into a nursing home, you would pay benefits.”

As time went on, however, people began turning to home health care and various assisted living options. Insurers responded in kind, adding “bells and whistles” to LTCi products to cover these alternatives, Slome said.

And the products proved very popular. Insurers sold 500,000-plus policies each year from the mid-1990s through the early 2000s. Over time, however, the trends worked against insurance companies.

People lived longer. Quality of care and options increased as seniors looked to long-term care as a life extension. They did let their policies lapse at rates anywhere close to what actuaries had predicted.

Industry lapse rates averaged roughly 4% a year from the principal amount, Slome explained. Lapse rates actually settled at around 1%. That difference might not seem like a big deal in the abstract, but it is a very big deal in reality. “ Once people bought this, they started to grow older. They started to see their health change. They

started to see other people who were needing it. And they did not drop the coverage.” – Jesse Slome

‘They did not drop’

“Once people bought this, they started to grow older,” Slome said. “They started to see their health change. They started to see other people who were needing it. And they did not drop the coverage.”

Consider the simple math: for example, let’s say Genworth sells 100,000 policies. At a 4% average lapse rate, after 20 years, 80% of those policies are gone. The industry average is to pay claims on about onethird of active polices, so Genworth pays claims on about 7,000 policies.

Using the same example with a 1% lapse rate leaves Genworth with 80,000 active policies after 20 years. Now they can expect claims from 25,000 to 30,000 policyholders.

As a result, Genworth needed premium adjustments — and lots of them. Data from just one state — Virginia — shows Genworth sought 17 rate hikes from regulators from 2016 to 2022. And Genworth is not alone. John Hancock Life Insurance Co. sought 13 rate hikes during the same time frame, and MetLife Insurance Co. or Metropolitan Life Insurance Co. also requested 17 rate hikes.

The Virginia State Corporation Commission, the state’s regulatory authority, reports 149 approved rate hikes for LTCi in the state since 2014. Another 35 rate increase requests are pending as of late August.

LTC Go Wrong? bit.ly/ltcwrong2022

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback. com. Follow him on Twitter @INNJohnH.

Fiduciary rule likely to return, experts say

‘Unprecedented’ health care provisions in Inflation Reduction Act

By John Hilton

The yearslong wrangling over regulation of financial product sales with retirement dollars is likely coming down to one point: the initial contact with clients.

Virtually the only thing left for the U.S. Department of Labor to do with its fiduciary definition rewrite is to essentially make all first-time advice fiduciary, analysts agreed during a recent webinar.

If it happens, that change would be significant and basically would return the DOL to its initial 2016 fiduciary rule, said Brad Campbell, partner at Faegre Drinker law firm. As it stands, the DOL’s package known as the investment advice rule makes rollover advice fiduciary.

“Once the rollover occurs, DOL is taking the position that fiduciary starts with the initial conversation,” Campbell said. “That’s a pretty aggressive reinterpretation of what they historically had said, which frankly, was the opposite, that most rollovers were not fiduciary.”

The investment advice rule has two main parts: a new prohibited transaction exemption allowing advisors to provide conflicted advice for commissions and a reinstatement of the “five-part test” from 1975 to determine what constitutes investment advice.

With the latter change, the DOL nudged advisors closer to a blanket fiduciary rule. Still, the department carefully noted that “truly one-time advice, perhaps like recommending a fixed annuity, would not be fiduciary advice,” Campbell explained.

With the Biden administration back in place at the DOL, work quickly began to do more tinkering with the regulation of financial product sales. The DOL’s Spring 2021 Regulatory Agenda confirmed that it will rewrite the definition of fiduciary. The Employee Benefits Security Administration was expected to issue the notice of rulemaking in the spring, analysts had predicted.

But that deadline came and went. Meanwhile, the industry is fully immersed in doing business under the investment advice rules that took full effect in July.

“So, most of the industry is now already complying with a standard that ... is pretty far down the road,” said Campbell, former assistant secretary of labor in the Bush administration. “Yet the DOL still says it’s not enough and wants to again change the rules on us.”

Complicating things further, the DOL faces two lawsuits seeking to toss out the investment advice rule. The Federation of Americans for Consumer Choice and the American Securities Association filed separate lawsuits in February in Texas and Florida, respectively.

Fiduciary likely to return bit.ly/fullrule2022

By Susan Rupe

The Inflation Reduction Act will impact everything from energy to health care — and is good news for those who are on Medicare or who rely on enhanced tax credits to pay for health insurance.

The $430 billion climate, health care and tax overhaul, which passed in August, also provides tax credits for clean energy, invests in climate initiatives, boosts funding for the IRS and enacts a 1% excise tax on stock buybacks.

The health care provisions in the Inflation Reduction Act are “unprecedented,” especially regarding the ability of Medicare to negotiate drug prices. That was the word from Larry Levitt, vice president for health policy with KFF, during a recent webinar.

The bill makes major changes to Medicare as well as extends the enhanced tax credits that enable Americans to buy health insurance through the Affordable Care Act exchanges. Those enhanced tax credits were due to expire at the end of this year, leaving an estimated 3 million people without coverage.

The ability for Medicare to negotiate prices with drug manufacturers “is the most major improvement in Medicare benefits since the ACA was enacted,” said Tricia Newman, KFF senior vice president and executive director of The Program on Medicare Policy.

“We come face to face with the costs of our prescription drugs every time we go to the pharmacy,” she said. “Everybody knows somebody who is struggling to pay for their medications.”

Although the bill empowers the Secretary of Health and Human Services to negotiate drug prices, only certain drugs qualify, said Juliette Cubanski, deputy director of The Program on Medicare Policy.

Qualifying drugs are high-spending brands and biologics without generic or biosimilar equivalents that are nine years or more (for small-molecule drugs or 13 years or more (for biologicals) from Food and Drug Administration approvals (with some exceptions).

The American Rescue Plan Act of 2021, enacted as COVID-19 continued to ravage the nation, increased the premium tax credits for purchasing ACA insurance coverage and extended those credits to more people. This enabled more people to purchase health insurance, swelling the ranks of those covered under the exchanges to a record of 14.2 million.

The Inflation Reduction Act continues those subsidies through 2025. It also prevents premium hikes that enrollees would have faced had ARPA expired.

Unprecedented inflation reduction bit.ly/irahealth2022

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents’ association and was an award-winning newspaper reporter and editor. Contact her at Susan.Rupe@innfeedback.com. Follow her on Twitter @INNsusan.

Is your IMO for sale?

More IMOs are cashing out, while some make big bets on the future

Over the past two decades, the fixed annuity industry has boomed, and the IMO business has boomed along with it. This growth has attracted private equity funds who are eager to buy in. It’s not surprising that more and more IMOs are taking the opportunity to cash in their chips, and many financial professionals expect this trend to continue. “I’ve never seen anything quite like it,” says Jake Boike of Retirement Resources, referring to the spike in acquisitions of IMOs in the past several years. “I stopped counting, but I’d bet it’s over 100?” Boike and his brother DJ joined their father Dave in the family business, and together they have built a very successful independent financial services firm that has thrived for over 30 years. But a few years ago, their IMO was acquired. “It was a bit surprising to me at the time, but it really shouldn’t have been” says Boike.

Caleb, Ben & Jonah Collier

Are my IMOs best 10 years ahead of them or behind them?

Harvesting vs. investing

“The way I see it now,” says Boike, “these IMOs are generally in one of two modes — investment mode, or harvest mode. ‘Investment mode’ means they are planting seeds that will pay off in the future. ‘Harvest mode’ is more about taking your gains from past investments. When our IMO sold, I realized we needed to find a new partner that was in ‘investment mode’ and planning for the long term.” Caleb Collier first switched IMOs several years ago for similar reasons. “My dad had been in the business for 20 years by the time my brothers and I joined him.” Collier recalls that he and his brothers began to sense a shift from their IMO

over the years. “We noticed more turnover at our IMO. They weren’t attracting and retaining talent on their team like they used to. We were in our 20’s at the time. And I remember looking at our IMO and asking ourselves, are my IMOs best 10 years ahead of them or behind them?” Collier understands why so many IMOs have decided to sell their businesses in the past few years. “I don’t blame any IMOs that have sold, or that sell in the coming years. Financial professionals are expecting more and more from their IMOs. Unless an IMO is committed to investing heavily into their business, it might be better to cash out during this window.”

Patrick Kelly, co-founder and CEO of Signal Advisors

A ‘get rich slow’ scheme

Patrick Kelly is co-founder and CEO of Signal Advisors, which bills itself as “the first technologyenabled IMO.” Signal has become one of the fastest growing IMOs, but Kelly started his career as an advisor. “When I left Northwestern Mutual to become an independent advisor, I met some ‘old guard’ IMOs who were definitely in ‘harvest mode’ — just coasting off of their past successes,” says Kelly. “But I was lucky enough to partner with an IMO that was in a major investment cycle when I joined them. It was clear to me, at the time, that their best 10 years were still ahead of them,” says Kelly. Kelly believes that companies like Signal will stand out in the coming years, especially in contrast to the IMOs who are taking chips off the table. “The next decade will belong to IMOs willing to do what my first IMO started to do over 15 years ago — be absolutely obsessed with finding a better way, obsessed with empowering financial professionals, and invest every dollar they have towards making that obsession a reality.” Signal Advisors has raised over $50 million of venture capital in the past few years from investors like Dan Gilbert (Rocket Mortgage founder, and owner of the NBAs Cleveland Cavaliers). “Having patient capital that takes a 20year view is so important. When you hear about ‘private equity’, that tends to be a whole different beast — shorter time horizons, and more about financial engineering than business building and innovating. Private equity doesn’t work for our long-term approach,” says Kelly. “At Signal, we like to say we have a “get rich slow scheme,” laughs Kelly.

Short-term vs. long-term thinking

When Boike thinks about the current IMO landscape, he likens it to real estate investing. “It’s not so different from investing in a house or a rental property,” says Boike. “If you plan to own it for 20 years, it’s worth making some big investments — new kitchen, new bath, maybe even get behind those walls and update the plumbing and electrical. But if you plan to sell it soon, it’s probably just getting a fresh coat of paint and maybe some landscaping for curb appeal,” says Boike. “Both approaches can make economic sense, but it’s pretty clear which of those people I’d want as my landlord!” Boike exclaims. Boike predicts we will see more and more acquisitions in the coming years, as more IMOs decide to either double-down or cash out. “The IMOs who are making long-term investments will attract more financial professionals, and I don’t blame the others for cashing out.”

Jake, David, and DJ Boike