Late last year we saw potential for a resurgence of interest from insurers into long-term care funding. Peter Barnett looks at what's happened since then
What financial services options are available to support them? With an immediate need care annuity (INCA), the vast majority of sales of which are via IFAs, you pay upfront with a single lump-sum to guarantee full payment of care costs until death.
However, with the UK care market currently valued at about £8bn, only £100m is spent on care annuities – so penetration is low.
What of pre-funded LTC insurance (LTCI)? James Lloyd, director at Strategic Society Centre, recently argued that no country in the world has an effective or functioning market in pre-funded LTCI product. Like other countries, he said, the UK market confronts “impossible demand barriers of affordability, consumer inertia and uncertainty about risk”.
Barriers do not just exist on the demand side. Insurers face such obstacles as limited profitability and market size, uncertain risks and adverse selection. The solution, Lloyd similarly concludes, is for the financial services industry to enter into a partnership with the government. It cites examples such as ‘ElderShield’ in Singapore and the long-term care insurance scheme of the Netherlands.
Bridging the protection gap
The demand side for these insurance products is also hampered by lack of consumer confidence and a significant advice gap. Research by Oliver Wyman found that only 14,000 of 53,000 self-funders received independent financial advice and of those, only 7,000 from an adviser with specific LTC qualifications such as CF8.
Good independent advice is essential and as an advisory board member of SOLLA, the accreditation body for advisers to the older market, I would strongly argue that advice should only be sought through its members.
Sources of sound generic advice are also now emerging – one of these is Paying for Care (www.payingforcare.co.uk), a new website launched by Partnership.
So what next? The political imperative could be a hard driver here, for looking at the government’s parallel stance on stricter rules around welfare and disability benefits and the raising of the retirement age, cynics might say that one use for LTCI could be to keep you working into your old age. A mixed economy of care funding and provision, where the state the individual and their family are supported by financial services products and services, will emerge.
Recent research by Demos (and supported by Unum) confirmed earlier Swiss Re analysis of Britain’s ‘protection gap’ in that we have some of the lowest levels of state and private protection against ill-health in the developed world, with the ‘squeezed’ middle classes earning between £16,000 & £50,000 p.a. being at most risk.
This report argues that by encouraging individual responsibility and engaging with the insurance industry, the UK can simultaneously lift the level of financial protection available to the ‘squeezed’ middle class while reducing the cost on the state.
Thus one answer to financing care in old age may be for the ‘financially capable consumer’ to get the protection habit at a younger age via an employer-supported menu-based lifetime protection product. One with elements of health care, prevention and intervention, unemployment and incapacity at work support – even with the possible inclusion of statutory sick pay. Such a product, which possibly begins life as some sort of income protection vehicle, could perhaps mature in older age into a care funding product.
It has to be recognised that there are regulatory and fiscal issues, particularly around solvency requirements, that will require resolution before insurers regain their appetite to engage in these long-term products.
But coupling these health and care funding stratagems with the right mix of short and long-term savings products – including ISAs, other investment vehicles and pensions, etc. – inside a decent advice envelope would give most people at least a fair start in providing for their lifestyle and health care needs in both working and old age.
Should the unfortunate happen and expensive care costs be incurred, then products such as INCAs and equity release would come into their own as part of care and estate planning best-practice models.
It is widely accepted that the best and most cost-effective outcome – for an older person, their carers and relatives – is for them to be supported in self-determination and to remain independent in their own home for long as possible, with institutional care kept at bay until the very last.
The chance has gone for the current elderly to plan for their care needs and the state simply has to find a way to properly assess and fund their care.
But via a taper, younger people will more and more be urged, incentivised and compelled into planning for old age as above, either directly or possibly via affinity-based group schemes – for example, through employers.
Providing the risks can be correctly identified and priced, and the appropriate advice envelope be funded, then we may get back to real insurance products having a key role to play in this new landscape.
Peter Barnett is a policy adviser in the House of Lords, an advisory board member of the Society of Later Life Advisers and chair of the Continuing Care Conference
