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Dilnot reforms fail to spark long-term care market

A lack of demand and regulatory uncertainty is killing off the insurance industry’s appetite to create long-term care products, providers warn.

Just a year ago the Association British Insurers and the Government agreed a statement of intent pledging to boost awareness of care issues and encourage insurers to launch products to help people meet the cost of care.

However, some of the largest insurers in the UK say the industry will not develop solutions while there is no demand. In addition, they say there are potentially too many risks for reasonably priced products to create a market even if demand picks up.

As part of the Care Act, from April 2016 the so-called ‘Dilnot cap’ will be introduced to limit how much people pay towards the cost of their care before the Government steps in. While the economist Andrew Dilnot recommended a cap of £35,000 in his landmark 2010 report, the Government finally decided on £72,000.

The means tested level has also been raised, so people with around £120,000 or less of assets will receive financial help if they need to go to a care home.

It was hoped the cap would give insurers certainty about the potentially liability they would be taking on and lead to product innovation in the long-term care market.

Aegon regulatory strategy director Steven Cameron says: “Protection-linked products haven’t taken off because providers don’t know who’s going to be in power in 30 years.

“Who’s to say what the world will look like then and how much an individual might have to pay? What will care look like in 30 years’ time? That’s when lots of people buying protection for care now might actually need it.

“There’s no demand for the products and too many unknowns – just saying we’ll pay the rest, it’s too risky. A provider who promised to pay whatever the cost of care ended up being would be a very short-lived provider.”

Cameron also warns there is widespread public misunderstanding of the cap, which only includes explicit care costs, and not food and accommodation.

Aviva head of pensions policy John Lawson says people are put off by the concept of insurance products “where you can lose your money”.

The Government’s older workers’ champion Ros Altmann has suggested the launch of ‘care Isas’, giving people a separate annual allowance for savings specifically earmarked to pay for care.

But Cameron and Lawson say locking savings away to meet care costs ignores behavioural economics and is doomed to failure. Instead, they suggest the new pensions environment, following the April freedoms, could help meet care bills.

Lawson says: “A more positive way of thinking about it might be to say, if you keep some of those assets  – such as pensions or ISAs – left until you need care, we’ll give you a tax credit.

“Say you’re being taxed at 20 per cent on your pension but you got a 20 per cent credit if the pension was paid to a care provider that would cancel out the tax. For ISAs you’d get a 20 per cent cash boost. That sends a much more positive incentive for savings.

“Now the change to pensions mean you can cascade through the generations, there’s another reason to hold assets back.”

Standard Life head of pensions strategy Jamie Jenkins agrees but warns many people will not have enough left in their pots.

He says: “The problem is we have an immature defined contribution pensions market – people can’t carve out care costs from a £30,000 pot.”

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. The Dilnot reforms are stupid, wasteful and ill-thought out. Whilst they may make some sense when written down on paper, the practical reality of implementing them is horrific. Most of the extra money will be spent on administration and providing care needs assessments. It’s not often that I have sympathy for County Councils but they are still scratching their heads wondering what to do.

    And its no surprise that there is no market for pre-funded products, because the cap on care costs is only going to provide a net benefit of around £150 a week after around six years of care. On average people will have spent over £200K on care by the time they hit the cap so it’s no security at all.

    The higher funding limits are obliterated by tariff income to make them virtually worthless to people with any reasonable form of pension.

    A wise government would scrap these immediately and start again. They could even radically try asking those that deal with care funding every day rather than an academic.

  2. FWIW, I still think the best mechanism to stimulate demand for LTC insurance products would be to allow tax relief on the premiums. It wouldn’t actually cost the Treasury very much either. 20% tax relief n premiums of, say, £200m would only cost £40m which, in the overall scheme of things is a very small amount and, in any event, would probably be offset by additional tax receipts from profits and salaries. It really could be that simple.

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