The long term care (LTC) sector has remained fairly inactive over the last few years, but Angela Faherty discovers the market is about to undergo significant change Click here to download pdf
For quite some time, the long term care (LTC) market has remained fairly quiet. The sector has seen little innovation in terms of product development, and although sales have been growing in the immediate needs sector, they have continued to fall in the pre-funded market.
A new idea – with problems?
However, all that has changed in the last few months as the sector has undergone a great deal of upheaval. The Pension Annuity Friendly Society (PAFS) launched a new pre-funded product that combined insurance and investment, the first of its kind in the dwindling sector. (Unfortunately, data on the new product for inclusion in the survey tables was unavailable at the time of going to press).
While the product has been warmly welcomed by a market devoid of any major development over the last few years, there are questions over the impact PAFS's Flexible Care Account will have.
One of the main concerns among LTC advisers is that the PAFS product does not pay out for residential care, which will evidently cause problems further down the line. On the other hand, a new product at a time when the market is seeing a reduction in providers could help to increase sales.
"Pension Annuity Friendly Society coming into the market at a time when many others are coming out could work to their advantage – but I do question how successful the product will be in the long term," says Peter Fisher, partner at the Nursing Home Fees Agency.
"One of the main problems with the pre-funded market is that there is no guarantee that your need for care will meet the requirements of the policy you have bought when the need arises," he says.
While PAFS's product launch marked a significant point in the LTC market, the trend for innovation has not continued.
Instead, Norwich Union Healthcare (NUH) decided it was to close its Flexible Protection Bond to new business in November 2003. Dean Critchfield, retirement marketing manager at Norwich Union, said at the time there were a number of reasons behind NUH's decision."The long term care bond market is small and has reduced over the past couple of years due to stock market performance. Consumer demand has declined and therefore it is not commercially viable to incur the costs of developing and maintaining this product line," he explained. NUH's decision was swiftly followed by AXA Lifetime Care's announcement that it would be withdrawing from the pre-funded LTC market from January 2004. And as we went to press, NUH announced it is to withdraw its pre-funded products. Application for Future Assured will not be accepted after 30 January 2004.
BUPA drops immediate needs …
As sales of pre-funded policies continue to fall, providers withdrawing from this area of the market is no surprise. However, BUPA's announcement to withdraw from the immediate needs market has raised a few eyebrows.
The provider's plans to focus its attention on pre-funded policies only from 1 December 2003 has shocked those working in the market, mainly because of the rough ride the pre-funded market has experienced over the last few years.
Sales have been low and there has been some criticism as to whether the product actually caters adequately to the needs of consumers. Speculation in the market suggests that BUPA's decision is based wholly on growing its share of the pre-funded market. And with fewer pre-funded LTC providers around, this seems like a shrewd business decision and perhaps the most likely explanation.
However, BUPA says its decision to withdraw from the immediate needs sector is because the market is capital-intensive and price-sensitive and hasn't offered the scale of return the provider was expecting. Commenting on the decision, Steve Flanagan, managing director of BUPA Health Assurance, says: "We are firmly committed to pre-funded long term care, as we think there is a strong market for people who want to cover the costs of care for their old age.We believe pre-funded plans are more affordable than paying for care later in life – when it often means drawing on savings at a time when people probably need them most."
Although BUPA's decision may have caused a ripple in the market, the provider is keen to develop its pre-funded product range. It accepts that there are challenges ahead and hopes it can lead the way for market innovation. "The pre-funded market is still in its infancy; and if we are to make it work, we have to be forward-thinking in product innovation. The onus is very much on insurers to be more creative in product development," says Martin Noone, head of intermediary sales at BUPA Health Assurance.
… and troubles advisers
While BUPA may be convinced of its decision to focus on pre-funded plans, the decision has caused confusion in the market. The provider appears to have gone against the grain and many advisers are baffled by its choice.
"I think BUPA's decision to withdraw from the immediate needs market is a huge mistake," says Owain Wright, head of the Care Funding Bureau. "They have the largest collection of care homes in the country and could use their position to help raise the profile of the long term care sector in this country."
One of the biggest problems the market faces is continued withdrawal from the LTC market by product providers. The sector is already bereft of providers and further reduction could lead to less competition, which could cause the sector to falter.
Still optimistic
However, market players are confident that LTC does have a future, especially in the immediate needs market, where there has been growth of approximately 25% year on year for the past three years. Therefore, looking ahead, there is no reason why growth should not continue in a similar vein. "In terms of sales in the long term care market, we are still only scratching the surface," says Wright. "The immediate needs sector offers the greatest potential and this is where advisers should be looking if they want to grow their business.
"The one thing I must stress is that it is not something that can be dipped in and out of. It is not just about understanding the insurance aspect of long term care – knowing information about state benefits and entitlements is part and parcel of the job."
One of the ways advisers and providers can help to increase awareness and improve sales of plans is by focusing on LTC as part of the overall retirement planning process. At the moment, however, one of the problems is that many advisers feel ill equipped to provide sufficient information to their clients. There are only a few long term care specialist advisers in the market, but the key is to work together, as Wright points out.
"One of the main problems in the market is education. The majority of clients do not know about long term care or the need to pay for it, and many non-specialist advisers are uncomfortable about providing information on a subject they do not fully understand," he says.
Spreading the word
While the market seems to be divided into two camps – immediate needs and pre-funded insurance plans – all are agreed that the key to future growth and heightened awareness is education.
"The reality is that people want to know they are making the right choices about any decision they make. They need to know where to go to get the advice they require – and that, ultimately, it is good quality advice," says Fisher.
Both Fisher and Wright are currently working on initiatives to help clients understand the need for forward thinking in long term care provision.
Wright is currently working with a number of non-specialist advisers to promote the LTC cause, with all clients requiring LTC advice coming through a referral service. Fisher is also in the process of creating a specialist advisory service to help educate consumers. The service is scheduled to launch early next year and is still in early development stages.
Change continues
For a market that has seen little change or development in a number of years, the last few months have been fairly hectic for the LTC sector. And it seems there are further changes ahead. Providers are aware that product innovation is key to stop the pre-funded sector becoming redundant, so further development in this area is likely. The number of providers operating in the sector is also expected to reduce further.
On the other hand, advisers and providers are confident that the immediate needs sector will continue to flourish. The population is ageing at a rapid pace and demand for care will continue to rise.
With pre-funded polices finally falling under the remit of the Financial Services Authority in October 2004, consumer confidence in the market may also see a boost. The key to success is education, and advisers and providers need to ensure they work together to increase awareness of the LTC sector.
