Although long term care products have now been on the market for nearly seven years, they can hardly be described as enjoying a rumbustious childhood. So far only around 20,000 plans have been sold and fewer than 100 IFAs have been active in selling them to clients.
Nevertheless in the US, it has been a successful concept with something like four million people buying cover and the expectation is that it will become more popular here.
The market leader is PPP lifetime care, a subsidiary of PMI provider, PPP.
It has around 14,000 policyholders and Peter Gatenby, chief actuary and director of the company, is widely regarded as the industry guru.
Gatenby first became involved in the long term care market when he was working for consulting actuaries William Mercer. In the late 1980s, one of his clients, Commercial Union, asked the firm to look at the market for older people, and what products were likely to appeal to them. Long term care was identified as a suitable product and Gatenby went to the US and spent some time talking to companies in the market, looking at the way the policies were set up and how they were sold.
William Mercer made a report to Commercial Union who in turn decided to go ahead and launch a long term care policy, which went live in 1991. Gatenby remained interested in the development of long term care products in this country and when he saw a newspaper advertisement for an actuary to work on new long term care products he decided to apply. He got the job and started work at PPP.
The insurer launched its product in 1992 and Gatenby has been involved with it throughout. He was a special adviser to the Government Health Select Committee in the mid 1990s and also to the committee set up to explore the idea of partnership insurance schemes.
There are several reasons why the long term care market has not taken off in this country in a big way, according to Gatenby. Political uncertainty about what the Government might or might not do to encourage people to save for their old age has held some people back from taking out plans.
Also the fact that it is unregulated means IFAs do not have to mention it as part of an overall financial planning strategy. Sales have not been helped by the fact that it is a difficult and sensitive product to sell.
The political uncertainty could be over by next year following an expected announcement from the Royal Commission. This was set up to investigate the long term care market and come up with recommendations as to whether or not the Government should encourage such schemes.
Its terms of reference were announced by Health Secretary Frank Dobson and an interesting fact is that the normal three year period of deliberation has been shortened to just one year – so clearly the current Government is keen to tackle the long term hurdle quickly.
All the committee members are totally independent, none work in the long term care market and Gatenby thinks they have a daunting task ahead of them shifting through reams of paper.
PPP considers it highly unlikely that legislation will be passed until the next century. Gatenby says: “It is clear from the Royal Commission’s terms of reference that the Government is looking to strike a balance in funding long term care for the elderly between the state and the taxpayer. However, given public funding constraints, free care for all is an unlikely scenario and as a result we believe that insurance will still have an important role to play.”
Gatenby will be giving evidence to the commission both as a director of PPP and as a committee member of the ABI’s committee on long term care.
First time care
The need for haste is highlighted by the fact that every year around 90,000 elderly homeowners require long term care for the first time. Gatenby points out that there are tens of thousands of people who need to consider their long term care options now.
Almost 50% of the over 65s have a disabling condition which may require long term care. The cost of nursing home care for an individual is around £17,800 a year. He adds: “A large number of people still want the state to pay for care and are against selling their home in order to fund care costs. The average home is worth £73,000 and the great majority of elderly people have paid off their mortgage. Given that 40,000 homes are sold each year to cover care costs, something like £3 billion is being released from house sales to pay for long term care.”
But is the Royal Commission likely to give a boost to the market? Gatenby’s view is: “If the Royal Commission’s recommendations are neutral, I would expect the market to develop more rapidly as it will take the uncertainty away. However, if it does recommend positive steps, like partnership schemes or tax relief on premiums paid, then the market could increase substantially.”
About half the policies sold by PPP are through its direct sales force, with the balance through IFAs. Recently the company had to make seven sales staff redundant but this was because they are refocusing their direct selling operation rather than anticipating lower levels of sales.
Gatenby is disappointed and frustrated IFAs have not been more active in the market and says he finds it difficult to understand why the products are so rarely mentioned – in his view they should be mentioned automatically as part of good long term financial planning.
However, he admits it is easy to understand why long term care policies are difficult to sell. “You have to talk to people about only being able to carry out a minimum number of active daily life tasks, about being disabled and incapable of looking after themselves. It is a depressing subject and it takes a lot of training for an IFA to be able to sell such policies effectively.”
One positive event due to happen later in the year is the launch of an educational package put together by a team of experienced IFAs to train advisers on selling techniques. Regulation is also likely to give the market a boost. Then IFAs will have to discuss the product when advising many older people who are considering overall investment or tax planning steps.
In five years time Gatenby expects that as much as three quarters of PPP’s long term care business will come in from IFAs. While it is not known when regulation will be introduced, this could be over the next year.
One reason why long term care is a hard sell is that it is an expensive product and premiums have to be paid on top of other essentials such as a pensions and mortgages.
Average premiums on lump sum payments are between £8,000 and £10,000 and on regular premium contracts around £800 a year.
Recently PPP launched a new service to enable more people to buy cover. Called Asset Access, it is provided through the Bank of Scotland’s Shared Appreciation Mortgage.
“Our Asset Access service can release equity locked into the home and this is used to purchase insurance which protects the home from being sold to pay for care. It means that elderly homeowners can maintain a substantial proportion of their estate while also allowing them to have adequate cover in place for care costs needed. No payments have to be made while the homeowner is living in their home and the mortgage is repaid on death or when the house is sold.”
Gatenby is delighted with the new scheme and says: “What we have here is a way of making your home work for you. Asset Access makes equity release an attractive proposition to borrowers at or near retirement, providing the protection required and ensuring peace of mind in the years ahead.”
Although he is a great fan of long term care, he has not yet taken out a policy. He explains that at the age of 38 he has two young children to bring up and that there are many calls on his income.
At this stage he is concentrating on maximising his pensions arrangements but says he plans to take out a policy in his 40s or 50s.
The average age of new policyholders at PPP is mid to late 60s.
With many reluctant to buy at younger ages, some will continue to question the potential of long term care. Gatenby believes that if the Royal Commission’s findings are neutral, he would expect the total market to have a potential of around half a million people. For it to grow much larger, the commission would have to recommend positive steps to encourage people to take out policies.
Even better news would be if the market was regulated and IFAs had to bring up the subject as part of an overall financial planning exercise, then Gatenby believes it could be four or five times bigger than it is today.