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James Lloyd: The PM’s ‘enormous’ prediction for LTC insurance

Lloyd James Strategic Society Centre MM blog

Despite media stories circulating of a £75,000 cap, the Government’s mid-term review contained no commitment to implement the Dilnot Commission’s ‘capped cost’ model, although ministerial comments still suggest an announcement is imminent.

However for insurers the more interesting statement from the prime minister actually occurred a few days earlier. Speaking on BBC1, David Cameron said implementing the ‘capped cost’ model will “open up an enormous insurance market so that people can insure against [catastrophic loss]”.

This assertion on live TV by a governing prime minister is striking to say the least, and should worry UK insurers.

At present, no pre-funded care insurance market exists in England – the last provider exited in 2010 citing lack of demand. This outcome should be no surprise. No country in the world has an effective market, and the demand and supply-side barriers to a market in England are manifold, as analysis by the Strategic Society Centre has explored in depth.

The prime minister argues implementing the capped cost model would change this, and result in an “enormous” insurance market. Is he right? The short answer is: no. The explanation for this is complex, and I have summarised two key issues in the box below.

Put simply, the design of the capped cost model has important implications for product design and the promises that insurers and IFAs could make to customers. Specifically, it would rule out guarantees that: individuals would not have to pay anything more toward their care costs; that a person’s £75,000 ‘meter’ would start once they claimed on their insurance; and, that they would not run out of money before they reached the cap. In this context, it is unclear how many IFAs will be keen to take qualifications to be able to advise on pre-funded care insurance under the capped cost model (another pre-requisite for an “enormous” market).

So, the capped cost model really does not appear to be the silver bullet for pre-funded care insurance the prime minister seems to be making out. Regardless of these complex issues, there remain entrenched barriers to the growth of any market, such as how few retirees have the cash to opt for care insurance, and reputational risk for providers entering the market.

What makes the prime minister’s statement strange is there has been no grand statements from the insurance industry claiming the capped cost model will lead to millions (or thousands) of people buying pre-funded insurance.

In oral evidence to the House of Commons health committee, both the Association of British Insurers and Partnership said they did not believe the capped cost model would result in a market for pre-funded care insurance. If you look closely enough, the Dilnot Commission itself stated that it did not think it “likely that there will be significant growth in specific, pre-funded long-term care insurance.”

The fact is in the 18 months since the Dilnot Commission, no insurance company has publicly committed to offering pre-funded insurance once the capped cost model is implemented. This is an entirely sensible response.

Some in the industry may dismiss the PM’s statement, but beware. Whether they like it or not, it appears UK insurers are going to be written into a contract with the Government to deliver on an “enormous” market in long-term care insurance if the capped cost model is implemented. Should that insurance market fail to live up to expectations, politicians may then end up asking hard questions of insurers as to why they are not delivering on their side of the bargain. And that is a reason to be worried.

James Lloyd is director of the Strategic Society Centre

Key reasons why capped cost model will not create “enormous” LTC market:

1. The “capped cost” model does not truly cap costs, as the Government itself has noted. Why? Before reaching the ‘cap’, self-funders will have paid more than the value of the ‘cap’, and beyond it, will have to go on making ‘top-up’ payments. This is because of the difference between what self-funders pay for care, and what councils pay (sometimes called the ‘local authority rate’). As such, the ‘capped cost’ model does not look at what self-funders actually expend on care, but at the ‘local authority rate’ that they have been excluded from owing to their wealth. What does this mean for insurance? Anyone that purchased a care insurance product that paid out £75,000 as a lump-sum or in instalments would in fact find they still had to go on making top-up payments toward their care, and may have to do so for years to come.

2. A person’s £75,000 liability under the capped cost model is uninsurable. Why? An insurance company will have no way of predicting when the notional ‘meter’ that records the liability starts, and when a person will subsequently reach the ‘cap’. This is because the £75,000 liability is determined by factors that insurers can price for (longevity, disability), but also factors that are actuarially uninsurable, such as the availability of informal (family) care, council decisions on social care budgets in a given year, and trends in unit costs in the social care market.

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