By Sue Elliot, Head of Actuarial Development - Care Solutions
The insurance industry has welcomed the publication of Andrew Dilnot's recommendations into the funding of care and support ("Fairer Care Funding"), believing they will help individuals better prepare for retirement. The recommendations help to clarify the way in which the responsibility of paying for care might be shared between the State and the private sector. If the recommendations in the report are implemented, they could present significant opportunities for the long- term care insurance market.
The UK over age 65 population is expected to double by 2058. While life expectancy continues to increase, healthy life expectancy is not keeping pace meaning the number of years a person can expect to live in poor health is increasing and hence a potential increase in care and support needs.
This problem is compounded by a change in demographics where the population is increasing faster at the older ages than at younger ages. This change will have a significant effect on the age- dependency ratio (the number of people not in the labour force versus the number of people in the labour force). Currently this stands at 25% but by 2056 it is projected to stand at 45% (before taking into account the changes to state pension age which will add at least eight years to female State pension age by 2046). The ONS projections show a much more stable ratio once these changes are taken into account.
One in four over 65 year olds can expect to have some kind of care and support requirement in the future and the average cost of care can range from £25,000 per annum for basic private provision to over £50,000 per annum for high end offerings and specialised care. The average length of stay in residential care is two years, but for self-funders the average increases to four years and for 1 in 10 residents the length of stay is eight years.
The immediate needs annuity market currently averages about £95 million of premium per annum. It reached its peak sales in 2004 at just over £110 million8 based on 1,730 policies8 which is a small proportion compared to the 435,000 people in nursing or residential care where a significant amount would have been privately funded.
Amongst the key recommendations to emerge from the report, include:
Capping of an individual's lifetime contribution towards social care costs. Once a cap is reached, individuals then become eligible for full State support. The cap suggested was between £25,000 and £50,000, with £35,000 considered the most appropriate and fair figure. Individuals would also be responsible for their general living costs such as food and accommodation. It is recommended that there is a cap on these contributions between £7,000 and £10,000. Currently lifetime contributions (including care and general living costs) are potentially unlimited. Their suggestion is that the cap is updated annually on the same basis as the basic State pension (i.e. "triple lock rule" - increase at the highest of average earnings, inflation or 2.5%).
An increase in the means-tested threshold, above which people become liable for their full care cost from £23,250 to £100,000.
Greater consistency across the country with the introduction of national eligibility criteria and portable assessment.
People who enter adulthood with a care and support need should be eligible for free State support immediately instead of being subjected to means testing.
Using the contribution cap limit of £35,000, for care, £10,000 for general living costs and the increased means test of £100,000, the commission estimated that its proposals would cost the State approximately £1.7 billion. This figure has prompted speculation that the Government might hold back on accepting the recommendations. It would be disappointing if they failed to react because of concerns about this level of additional funding which is less than 2% of NHS funding (approximately £100 billion). The proposed caps may therefore be increased to make the recommendations more palatable for the State. The proposed increase to the means test may also be reduced for similar reasons. However, it will mean cuts from other budgets or increased general taxation - both of which are not politically attractive. But doing nothing is not politically attractive either. They need to do something but perhaps not go as far as Dilnot has recommended.
In terms of how this might affect the insurance industry, the proposed £35,000 cap for individual costs for care could help re-invigorate the long term care insurance market. This greater certainty will allow insurance companies to design potentially more affordable and simpler products to help individuals with their financial planning.
Capping the insurance claims at £35,000 would have the effect of reducing the premiums for the insurance policy to some extent, depending on the period of coverage provided by the insurance. However, it reduces, but does not eliminate, the incentive for the insurance company to look for preventative measures to try to reduce the length of period under claim.
Private insurance could take many forms such as immediate needs annuities (which are currently available), pre-funded insurance of various types, a link to life insurance (e.g. extend critical illness coverage or accelerated whole life), a link to pensions (e.g. disabled life annuity) and a link to housing wealth using equity release as a funding mechanism. Insurance solutions could also be introduced that supplement what the State will provide as seen in other countries such as the US. A lot of people may not be happy with "national standards" and will want to top up or seek alternative care arrangements to what the State offers. The mention of equity release (ER) as a possible source of care funding shows a further step toward the ER industry receiving official endorsement, potentially a "government stamp of approval".
The report indicates that a White Paper would be published by the end of 2012, but subsequent press coverage quotes Dilnot as saying that he would expect a White Paper by Easter of next year at the latest. However, it is up to us, as an industry to keep the momentum going in the interim.
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