The market for pre-funded long-term care insurance is dead and insurers should now focus on delivering a state-sponsored scheme in a public / private partnership, according to a new think-tank report.
Gone for Good? Pre-funded insurance for long-term care from the Strategic Society Centre argues that no country in the world has an effective or functioning market in pre-funded LTC products, and like other countries, the UK market confronts "impossible" demand barriers of affordability, consumer inertia and uncertainty about risk.
"The failure of the pre-funded LTCI market in the UK is not a failure of the financial services industry," writes author James Lloyd. "The issues encountered owe far more to the characteristics and vagaries of human behaviour and cognition, than any industry shortcomings, and are common across LTCI markets abroad."
Even if the UK were to achieve take-up rates of 15% (equivalent to the current international leader - France) this would still result in a social care system that was under-funded, means-tested, excessively rationed, and with many households confronting ‘catastrophic' bills for paid care, writes Lloyd. Barriers do not just exist on the demand side, he argues. Insurers face barriers including limited profitability and market size, uncertain risks and adverse selection. He also cites the number of independent financial advisers (IFAs) qualified to advise on LTCI products is so low as a "major impediment to the development of the market".
The report also reviews various policy levers that have been suggested as methods of resurrecting the pre-funded market but concludes that these are "wholly inadequate against the entrenched demand-side barriers that exist." For example, there is a lack of evidence that tax breaks would work while auto-enrolment for a benefit that some would never claim might be illegal.
The last provider of pre-funded long-term care insurance in the UK exited the market in July 2010 citing a lack of demand. Around 36,000 pre-funded policies remain in force
The solution, Lloyd 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.
"Not only has the high level of coverage that has resulted from such schemes gone a long way to solving problems of long-term care funding, it has also enabled governments to introduce working-age contributions, reducing the scope of the kind of retirement means-testing in social care that has done so much to undermine the pensions industry in the UK," Lloyd writes.
"Rather than a market of tens of thousands, such public-private partnerships would result in participation levels measurable in the tens of millions," he concludes.
The report comes at the time of a major government review into the future of long-term care funding in England and Wales. The Dilnot Commission on Funding Care and Support is due to report in July 2011, with a White Paper from the Coalition Government promised before the end of the year.
Look out for insurer reaction to the report in the April edition of Health Insurance.