Academic journal article Journal of Risk and Insurance

Issuance Decisions and Strategic Focus: The Case of Long-Term Care Insurance

Academic journal article Journal of Risk and Insurance

Issuance Decisions and Strategic Focus: The Case of Long-Term Care Insurance

Article excerpt


Increasing costs of long-term care are placing ever greater burdens on state and federal budgets, yet private long-term care insurance remains a relatively minor financing vehicle. Although many researchers provide rationales for the limited private market, some life-health insurers have forged ahead into this relatively new and risky line of business. We investigate what makes these insurers different and whether managers are following a diversification or strategic focus strategy. We find that strategic focus is a consistently important factor and that managers' participation and volume decisions are made independently.


Private long-term care insurance (LTCI) is a relatively new product that has not yet contributed substantially to the financing of long-term care. (1) The Congressional Budget Office estimates that less than 5 percent of long-term care expenditures are covered by LTCI (Marron, 2006), whereas Medicaid covers almost half. Currently, only about 10 percent of life-health insurers are active in the LTCI market. If private LTCI is to become part of the solution to reduce the tremendous pressure that Medicaid puts on both state and federal government budgets, we need to understand the forces that stimulate managers of insurers to become active in the LTCI market. (2)

Policies issued by insurers essentially are liabilities and arguably represent the primary source of default risk for those entities (Downs and Sommer, 1999). Factors influencing managers to issue liabilities have rarely been explored in the risk management and insurance literature, however. Our objective in this study is to provide insight into the determinants of insurance managers' decisions to enter a relatively new and risky line of business, i.e., LTCI, and the extent of their commitment.

Some researchers consider the private LTCI market to be potentially huge as the populations of developed nations age and the post-World War II baby-boom generation retires (see, e.g., Doerpinghaus and Gustavson, 1999; Cohen and Weinrobe, 2000). Many others suggest that the market is rather limited for reasons such as Medicaid "crowd out" (Doerpinghaus and Gustavson, 2002; Brown and Finkelstein, 2004), complex intrafamily interactions (Pauly, 1990; Zweifel and Struwe, 1998), limited actuarial experience (Murtaugh, Kemper, and Spillman, 1995), uncertainty about future costs of care (Cutler, 1993; Cohen, 1998; Moore and Santomero, 1999), and asymmetric information (Sloan and Norton, 1997; Finkelstein and McGarry, 2003). For years, LTCI nevertheless was the fastest growing sector in the U.S. life-health insurance industry, with average annual growth rates approximating 20 percent between the late 1980s and 2000 (Coronel, 2000; Life Insurance Marketing Research Association, 2001). Industry LTCI premiums have actually shrunk since 2001 (Panko, 2005), however, which may indicate that the private LTCI market now is being limited by the constraints mentioned previously.

The combination of burgeoning LTC needs, increasing stress on government-provided insurance plans, and tepid growth of private markets means that a better understanding of decisions to underwrite private LTCI should be of interest to many different groups. These include aging consumers and their families facing the substantial, future expense of long-term care services; (3) managers of life-health insurers who must at least consider participation in this relatively new, yet untested, market; and state regulators who now face federally induced legal incentives to encourage the private LTCI market and/or have embraced economic development roles. (4)

Among the critical factors we examine is whether insurance managers active in LTCI do so for strategic focus or diversification reasons. According to the diversification hypothesis, firms add value by diversifying into a variety of business lines, which results in benefits such as reduced risk and access to internal capital markets. …

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