The regulation of long term care insurance has been a matter for debate ever since the first policie...
The regulation of long term care insurance has been a matter for debate ever since the first policies were launched over 10 years ago, yet until now it has not featured on the Government's agenda. The Royal Commission on long term care and the Government's response embodied in the NHS plan have finally acted as the catalyst. So now we have some options to consider, with some ideas about a CAT standard thrown in for good measure.
Before outlining the options for regulation, it might be helpful to put them into context with a quick look through the background. Despite the best efforts of 14 companies over 10 years, only 34,000 policies have been sold. The investment-based products are already Financial Services Authority-regulated (FSA), and many of the risk-based designs are supported by similar standards of self-imposed regulation as a matter of good business practice. The Treasury concluded that there has been no evidence of detriment to consumers. But with such a small market and with so few claims, it is impossible to tell what would happen if sales suddenly took off, bringing new providers and a marked increase in the number of intermediaries looking to do long term care business.
Unified call
The reality is that all the powers that be want regulation in place to protect the consumer. That includes the Royal Commission, the House of Commons Treasury Committee, the Joint Scrutiny Committee on the Financial Services and Markets Bill, major charities and consumer bodies and even the insurance industry itself. The debate has not been whether there should be regulation, but what form it should take. The Treasury paper proposes four options:
l No statutory regulation. Rely on voluntary codes of practice plus the introduction of CAT standard benchmarks.
l Partial regulation, including authorisation of providers and a standardised disclosure regime to cover information provided to potential purchasers.
l Full conduct of business regulation, covering advice as well as authorisation and disclosure in the selling and marketing of long term care insurance.
l Full conduct of business regulation of the sale and marketing of all medical insurance plans, including critical illness, income protection and long term care insurance.
The Government prefers option three, full conduct of business regulation, although it made its case with little conviction. A scenario, presented as a virtuous circle and supporting the case for full regulation, runs as follows: full regulation engenders customer confidence, releasing pent up demand for the products, which encourages new entrants to the market, stimulating competition and bringing down prices.
An alternative scenario might be that the cost of compliance acts as a barrier to entry, perhaps even causing some existing providers to withdraw, leaving a more restricted market labouring with unattractive products that few can afford.
In fairness, the Treasury paper does see both sides of the coin. One cannot help thinking that it has not been well served by its Committee on long term care investment products whose terms of reference included an invitation to follow up the statement made by the Secretary of State for health, Alan Milburn, in which he said: "We intend to explore with the financial services industry how it could best design long term care insurance products, and other financial products, to see if they could be made attractive to a wider audience."
Having read the report several times, it is still hard to resist the conclusion that this part of the brief has been neglected. All of the focus is on the regulation of products as we know them today. There is no vision as to how they might be re-engineered to bring them within the financial reach of more people, in particular, the average pensioner.
Stagnation
There is no doubt that the long term care market has been stagnating. Only 5,000 policies were sold in the last two years. Unless you believe in the virtuous circle argument mentioned earlier, there will have to be a lot of new thinking and new development if the insurance industry is to play a bigger role in the mixed economy of solutions for long term care funding. That would argue for options one or two by allowing a more flexible framework within which new approaches might be developed, while at the same time maintaining an appropriate level of protection for the consumer.
The report highlights the expensive nature of long term care insurance products, but suggests that the introduction of free nursing care in nursing homes, coupled with the new minimum income guarantee and pensioner credit, will reduce the amount of cover people need to buy and give pensioners more money to pay for it. Age Concern suggests that the typical cost of a long term care plan will come down from £16 a week to £12 a week. But in a society in which 72% of those above State retirement age rely on State benefits for more than 50% of their income, the affordability gap is still huge, especially when you double up the cost of providing cover for both spouses.
Unfortunately, many of the suggestions that have emerged in the CAT standards will have the effect of pushing costs up, not down.
Here are some of the suggested measures:
l Plans must pay benefits throughout life rather than for a restricted period. Throughout life benefits are the most expensive type of cover, while limiting payments to, for example, three or five years (adequate in the vast majority of claims) would produce discounts of 30 or 40%. These limited period plans played an important part in the development of long term care insurance in the US and could do so here.
l A duty is to be imposed on the plan providers to advise each customer whenever there is a change in State benefits or taxation which might impact on the cover arranged.
l Annual visits are to be made by the plan provider to those in claim, receiving care, and to validate the quality of service provision.
l Provision of a dedicated information and advice service.
l Independent adjudication of claims by health professionals, with provision for a second opinion if the assessment is disputed.
Amazingly, it is suggested that a plan which provides no inflation protection of benefits can meet the CAT standard. The report is littered with caveats that consumers must buy sufficient cover to bridge the gap between what can be afforded out of income and the total cost of care. There is no more certain way of ending up short of cover than by taking out a level benefit plan. And if you do have a shortfall and need to apply for help from your Local Authority, they will treat the proceeds of your policy as income in the means test. So you end up swapping insurance pounds for benefit pounds and are no better off.
The report concludes that "if the market remains static, regulation would be expensive for little consumer benefit. But if regulation and/or the changes following the Royal Commission's report meant a large increase in product sales, then the increased protection (and possibly increased competition) could outweigh and indeed reduce the costs."
It is likely the Government will go with option three. CAT standards will be introduced, but hopefully these will be radically improved when the Treasury receives responses to the consultation document. And what will happen to the market as we know it? There will be some growth, but only marginal. Any innovation aimed at generating something closer to a mass market will have to be developed outside the regulatory regime.
The case for sound consumer protection and good standards is unarguable, but if there are hopes that the package on offer is going to wake the sleeping giant from its slumber, they will be dashed all too quickly. At least then we can get on with some new thinking.
Richard Thomas is managing director of Independent Care Advisory Service at RED ARC Assured
