Amiad Ben-Meir and David Zaray-Mizrahi set out the successes and failures of long-term care insurance in Israel, and the lessons learnt by the country’s insurance sector along the way
Israel made international headlines in early 2021 when its fast and efficient COVID-19 vaccination programme led the world – and provided some of the earliest data to help us understand the efficacy of the two-dose Pfizer vaccine.
Less well-known is that Israel is also an exceptional case study in long-term care (LTC) insurance. With more than 30 years’ experience, the Israeli insurance market provides long-term individual cover, short-term cover sold via the
National Health Funds (NHF), and employer-provided group cover. In 2016, there were roughly 66 LTC policies per 100 people in Israel (compared to 2.3 per 100 people in the US, as of 2014); 70% of this was provided in the form of short-term cover by the NHF, and 12% was individual long-term cover. The result is a market with a unique and unprecedented LTC experience across all ages and multiple generations.
Globally, the governments and private insurance sectors in most markets worldwide have failed to close the large protection gap for this crucial risk. The Israeli individual LTC product also failed recently when it stopped selling in 2019.
Individual and NHF covers
There are lessons to be learnt from the long-term individual and short-term NHF covers, including their varying success and differences. Both provide annuity benefits with the insurance trigger based on activities of daily living (ADL) definitions.
Table 1 highlights key features, and shows the individual cover has substantial social advantages over the NHF product – particularly the flexibility and no-loss-of-cover feature. However, the individual product included substantial risks to the carriers, and stopped selling after the last reinsurer pulled out from backing it.
Why did the individual product fail? Why is the NHF product successful? And how can individual LTC products be successful?
Unsustainable long-term risks
Despite being available for decades, the individual product ultimately did not prove viable in Israel’s (conduct and prudential) regulatory environment. The balance sheet impact of the guarantees was exacerbated by Solvency II, and will be further impacted by the imminent implementation of IFRS 17. The individual product provides an annuity benefit with whole-of-life cover and guaranteed (non-reviewable) level premium rates. (We note that increasing premium rates on in-force policies in Israel requires regulatory approval. Historically, this has rarely been granted, even in times of significant losses. The market assumes that the regulator would not approve an increase, so we treat premiums as fully guaranteed.)
These features essentially lock in long-term risks, leaving the insurer with no way to review or adjust the pricing or benefit amounts as the experience unfolds and biometric trends such as mortality and morbidity evolve.
The individual LTC product carries similar risks to an income protection product. These include claims frequency (inception), longevity (termination) and interest rate. However, with a much longer tail, errors in LTC pricing assumptions are exacerbated over time. When taking a long shot in football, even the slightest angle deviation in the kick will cause the ball to miss its goal; the longer the range, the larger the margin of error. With an average term at sale of about 30 years, and with effectively guaranteed premiums, the chances of missing the goal are high when trying to develop and price a profitable and sustainable LTC product.
“When taking a long shot in football, even the slightest angle deviation in the kick will cause the ball to miss its goal”
Furthermore, the individual LTC product does not experience any lapses, as regulation does not allow cancellation of cover when the insured ceases to pay premiums. Rather, the policy is treated as paid up and the cover is adjusted accordingly. This regulatory requirement significantly extends the already long duration of the biometric risks. All these features translate to a materially high-risk product that requires high cost of capital for cover providers.
The regulator plays a crucial role in the success of LTC cover in Israel. On one hand, it is tasked with ensuring that the LTC product provides the required cover in the long-term and at an affordable cost. On the other hand, it is expected to ensure that insurance companies can withstand future changes in the experience and meet long-term liabilities to customers. This trade-off between granting guarantees to optimise social protection versus taking risks is the essence of insurance risk-taking, and the balance that should be sought in any insurance product.
The success of LTC therefore strongly depends on the regulator’s ability to find the adequate balance with respect to individual LTC products. The unsustainability of the inherent guarantees in such a long-term product led to the cessation of sales in 2019. A new balance that makes the product more viable needs to be found – for example, permitting pricing risk that is manageable in the long term and results in appetite from (re)insurance companies to provide this critical cover.
Sales channels and low frictional costs
The sales channel is arguably the main driver of the high penetration of the NHF LTC cover. The fact that it is provided by Israel’s four NHFs creates high product awareness. Cover is provided at all ages and is free for minors. More recently, the NHFs have started automatically providing cover to newborns, resulting in high take-up for children and an increasing take-up for young adults when those policies are eligible for conversion.
The government has an interest in maximising insurance cover, as it reduces elderly reliance on government support. The product’s success is driven by low frictional costs of sales and capital, and the high take-up rate, mitigating anti-selection of the simplified underwriting rules.
“A healthy LTC portfolio can only be achieved through a solid risk management framework and robust portfolio monitoring”
Nonetheless, the NHF product does have disadvantages. The maximum benefit is relatively low – it does not meet current monthly at-home care expenses in Israel, which exceed £2,000. The benefit is paid for a maximum of five years, which may not be sufficient for some claimants, and the claim trigger definition does not allow for serious illness. The main disadvantage, however, is the uncertainty around coverage beyond the NHF term period and the extent of any future rate increases – especially for young members who are currently subsidising older members.
Although these features are partly what make the product actuarially viable, and the cover provides basic protection, it often falls materially short of LTC social insurance needs. An individual top-up product that fills those gaps would be welcome.
Risk management and monitoring
Given the exceptionally long-term nature of the individual cover, it is difficult to assess future risks and trends – even if it were possible to isolate external factors such as market, political, economic and demographic changes over such a long period. A healthy LTC portfolio can only be achieved through a solid risk management framework and robust portfolio monitoring. Such a framework should leverage policy-level data, and needs clear guidelines on which trends or observations should prompt a review of the business and its management.
As mentioned, reviewable rates and regulatory flexibility would reduce the need for heavy loadings to cover for the guarantees and long-term uncertainty. Coupled with a strong portfolio monitoring system and a clear risk management framework, a new individual product could continue to be sold at realistic rates.
Back of the net
The NHF cover still leaves a substantial monthly financial burden on Israeli families, indicating a clear insurance gap in LTC despite Israel’s relatively high penetration rate. A new affordable and sustainable individual product would contribute to a more resilient Israeli society. In finding a suitable compromise between guarantees and product viability, we should not allow ‘better’ to be the enemy of ‘good’.
From artificial intelligence-powered beehives to X-ray headsets for surgeons that are powered by augmented reality, Israel is known for innovation. Many more lessons could be learnt and leveraged from its insurance market. New, innovative LTC insurance solutions are an open opportunity for (re)insurance companies in the country. There is a lot of data to work with, and the dialogue is ongoing.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy, nor constitute an official statement, of their respective employers.
Amiad Ben-Meir is chief actuary at Manbara, insurance database management, Israel
David Zaray-Mizrahi is a portfolio management actuary at Swiss Re, Israel
Image Credit | iStock
