How Long Term Care Insurers Calculate Risk
UPDATED: February 17, 2010
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Calculating risk is what insurance is all about. Generally, the higher the risk, the higher your premium is likely to be. If you’ve had several accidents in the last year, chances are your auto insurance is going to be sky high. In the same vain, if you’ve had several health related issues in the last year, your long term care insurance is also likely to sky high. It’s helpful to know just how insurers calculate risk when it comes to long term care insurance, so consumers can avoid rates referred to as “sky high”.
Bob Scott, who has been practicing law in this area for over 30 years, explained the process. “From an underwriting point of view, the insurance company wants to insure people that are in good health. It does not want to insure people that are already sick because those people are likely to file claims sooner and that means they don’t make money on those policy holders.
They look for people who are pretty healthy among the general spectrum of a population and they price for certain disabilities and conditions they feel are more likely to lead to an early claim. For example, if someone has a tendency for high cholesterol, which may suggest that there will be a greater potential of stroke and therefore a triggering of the conditions requiring payment of benefits. Therefore, they may price premiums higher or not issue a policy at all.
Insurance companies also know that people who tend to buy far more insurance than is reasonable for somebody in their circumstance are not good risks as they may be hiding something that the insurance company may not be able to pick up on.”
Turning the tables
Buying insurance is not a one way street. Just as insurers calculate risk on potential customers, potential policyholders must do the same with their insurers. The best way to do that, according to Scott, is by looking at their ratings – although he also provides some cautionary advice. “I would look at the ability of the insurance company to make premium increases. Look at the financial strength and integrity of the insurance company. There are significant differences between insurance companies that most people aren’t aware of. Ratings are helpful in terms of financial stability of the insurance company at the particular time, but a rating is very much a snapshot than a predictor.
There are a series of ratings from Best insurance reviews to Moody’s to Weiss ratings. These ratings are something to consider, but the fact that an insurance company may look terrific today doesn’t mean it will be down the road. One of the largest insurance failures in recent history was a company called Executive Life. That company enjoyed top of the line ratings by some of the rating agencies – just until the time it went under.”
Word of mouth
It’s common to ask friends and family about their experiences with products and services – especially when our experience has been limited. We asked Scott what word of mouth is worth when buying a long term care insurance policy. Surprisingly, he said, “Zero. Word of mouth from friends and family is usually very limited because they have had very little experience. With any particular company or product, a friend’s experience is typically not entitled to great weight. Complaint records with a state insurance department based on the number of complaints per policies issued, that’s more meaningful.”