Earlier this month the Strategic Society Centre published its response to the Dilnot Commission on Funding of Care and Support. In “The First Step?”, we give a comprehensive and broad analysis of the Commission’s recommendations. But perhaps the most important contribution of the report is to provide some firm estimates of take-up of private care insurance products were the recommendations of the Dilnot Commission implemented in 2015.
As many readers will know, the Dilnot Commission has proposed a ‘capped cost’ model, which could more accurately be termed a ‘capped exclusion from means-tested support’ model. Individuals would have their needs regularly assessed by their council, and if they are too wealthy to be entitled to support given the council’s means-test, the amount they would have received will be recorded. When this accumulates to £35,000, they will then be reassessed on a ‘means-blind’ basis.
As I have pointed out elsewhere on the pages of Money Marketing, strictly speaking, the £35,000 liability is uninsurable because it is determined by variables that insurers cannot price for (informal care provision, council decisions on support) as well as factors that can be priced (disability, longevity).
The result is that private care insurance products – whether pre-funded insurance or disability-linked annuities – would probably have to involve something like a £10,000 premium for a £35,000 lump-sum pay-out upon reaching a defined level of disability.
Given the existing immediate needs annuities market for residential care will soldier on regardless, what would be the likely level of take-up for pre-funded care insurance and disability-linked annuities under the Dilnot Commission’s proposed scheme?
Pre-funded insurance take-up will be constrained by affordability, consumer behaviour barriers, and the fact that before retiring, individuals would be better off putting their money into a pension. So, the figure we have come up with is a 6 per cent take-up rate among new retirees in England – about 45,000 products each year. This would eventually see around half a billion pounds of new funding coming into the social care system each year.
For disability-linked annuities, similar constraints on the market apply. Among defined-contribution pension savers at retirement, many have small pots and the tendency to maximise immediate income – rather than, say, obtaining inflation protection – is endemic. So, we estimate that around 8,300 annuities would be sold each year. If these products were sold from 2015 onwards, then around £200m of new funding would come into the social care system from around 2025 onwards, when annuitants would likely start making claims en masse.
Some readers may think these figures are excessively optimistic. Others may think them far too low.
Good. We are long overdue a properly informed debate in the social care arena about the potential usage of private insurance based on actual estimated figures. For years, policymakers have been bombarded with bland statements about the potential use of insurance to fund care. But the care system is in crisis, and we all now have a duty to roll up our sleeves up and engage in informed, pragmatic discussion.
The insurance industry also has an interest in a properly informed debate. Long-term care insurance is not like mobile phone insurance. The shortage of funding in the care system leads to unmet need, overburdened carers and hospital visits: real people experiencing real suffering. In the wake of the Dilnot Commission, if the insurance industry overpromises what it can do and how much new money it can bring into the social care system, the insurance industry as a whole will suffer if it is perceived to have not kept its side of the bargain. Even companies that have no wish to enter this market have an interest in ensuring that 10 years from now, critics are not attacking the industry and blaming it for failing to keep its side of a contract on social care funding reform.
In short, we all need to tread carefully, and back up our statements with proper estimates of take-up. At the Strategic Society Centre, we look forward to reading estimated take-up figures from other stakeholders in this debate; empty statements about the apparent potential of this market will no longer do in the context of the care crisis confronting the country.
James Lloyd is director at The Strategic Society Centre