Who cares?

Providing care can be labour and medically intensive, and therefore financially intensive. In some societies, and in previous generations, it would have been assumed that the children look after their parents. We ?can't be as confident today.

Consider the four-two-one problem in China. The one-child policy and increasing lifespan mean that the only offspring may have to look after both parents and the four grandparents. Long-term care (LTC) products are aimed at solving these concerns.

Three main messages emerge from looking at this issue internationally:

1. LTC products are a growing business around the world, particularly in Asia. The LTC market worldwide has premiums in excess of US$12bn, with the majority of that in the US.

2. Care funding and services have a strong cultural decision-making component. But in many regions, established cultural practices are being put under pressure by rising costs, increasing longevity, and reduced state and community support.

3. Advice on care planning, with or without funding or insurance, has significant value. But it also has costs. Where the value of this advice is realised and realisable, communities will be better off.

Global models

While the UK debate about funding and product design for post-retirement care and long-term care products develops, it's worth looking at what other countries are doing and which product types will inform the UK's emerging LTC market.

Care products can be classified ?into various forms:

• Pre-funding products: savings products that require long-term contributions to build up a fund for when the care is needed. The payouts are either a lump sum, an annuity or fund an insurance product.

• Insurance products: where premiums are paid in return for just-in-time care funding from the insurer when specific care conditions arise.

• Care service products: a combination of the above linked to providing the care required, rather than just the funds to pay for care. For example, the 'product' will provide a night nurse for critically ill patients.

• Post-funding products: products, such as equity release, which issue a person or family's asset value to pay for required care services.

These products make up the options for private insurance. However, in many countries, these product types have not yet replaced the traditional alternatives, which have proved to be good options when they are reliable and can be expected to endure. The alternatives are state payment of the cost of care, state provision of the care services, and provision from family and friends.

Society matters

There are several economic and social reasons why LTC products emerge. For example, a client in China told me that the best feature of an LTC product for her would be guaranteed access to her hospital of choice. In the US, where private medical spending far exceeds public spending, certain care is not forthcoming unless there is a private insurance product in the background ?to ensure payment.

But care products will also emerge ?in different ways according to cultural norms. Some countries have a concept ?of later life care modelled around the nuclear family. The grandchildren are expected to care for the elderly, thus reducing the need for third-party ?funds to pay for private care (but not reducing the need for funding medication and hospitalisation).

However, in rapidly urbanising countries, there is a growing separation between generations. As younger generations move to the city, there will be few relations to provide care, but there may be a greater sense of community for those who stay in rural locations.

Socio-political considerations emerge from the debate between general public versus private medical and care services. The UK has a long history of state provision particularly for the less well-off, but 21st-century pressure on government resources makes this more problematic - austerity and an ageing population.

In Germany, for example, the state benefits provide a certain level of care cover, but the middle- and upper-class population groups can top up the state benefits with private cover.

Product features

Any insurance product needs to have a few key features. First, there must be a trigger to determine benefit payment. This needs to have a reasonably low probability of occurring. The fundamental insurance pooling of risk only works when the majority can pay a smallish premium so that the minority receives a relatively larger payout.

For LTC products, a typical trigger would be activities of daily living (ADLs), for example not being able to perform three of a list of seven activities covering things like dressing, bathing and cognitive functions.

ADLs do not have a good reputation in the UK, but are common LTC product features in France and Germany. In Japan, it is common to have triggers that are more defined in relation to critical illness, with all the complexity that requires.

Second, the product would need a defined claim payment. Indemnity payments (covering the actual cost), are problematic in that they can lead to skewed coverage and high-claims inflation, which ultimately makes the product unaffordable. Where the insurance product is linked to a service product, this can be better controlled because the product provider can control the cost. So, a defined financial lump sum or regular payments give the insurer more control.

Access to the products would be with or without underwriting, that is those more likely to claim would not be able to buy the product, or could have a period after taking out the policy during which they cannot claim. This is, therefore, an effective method of reducing the premium, but decreases the availability of the product. The regulator can then have an impact on the propensity to buy and the propensity to advise to buy (that is commission, advice fees, comparative commission versus other savings and insurance products).

Some countries, such as Singapore, have made LTC cover mandatory. The regulator then defines a product design and decides whether there will be a small or large number of providers, that is a small or large amount of product, premium and service competition.

In the US, product purchase is tax incentivised. From an adviser's viewpoint, it is not clear whether this makes much difference - the net cost of the premium is lower but this may only affect the level of cover taken, rather than impact the decision to buy (and advice to buy).

And then there would be all ?the 'normal' insurance options: ?unisex rates, level or increasing premiums, level or increasing cover, conversion options, reinstatement options, paid-up benefits, etc.

UK action

So what does this all mean for product sales in the UK? The product is probably not going to be simple, reflecting the fact that the need is not always straightforward. For example, what ?if your client had dementia and ?needed supervisory care, medication ?and hospitalisation?

Advisers will need to be well informed and illustrate clearly to clients what the actual costs of care are, as well as the consequences of depending on state benefit and the support of family and friends.

The current generation of people paying into the benefit system may have seen their parents well off on state benefits and services and family support.

However, the next generation may see reductions on both fronts, escalating costs from medical inflation and longevity increases. In between is the opportunity to advise clients to take positive actions that will ensure they are well cared for in the future.

The LTC market worldwide is growing because of several inevitable powerful forces. The insurance and savings solutions are not straightforward and require careful interaction between state benefits and services, and private products and services, on the back of changing cultural and community norms.

It all needs the provision of information and advice so that consumers, clients and potential clients can make the tough choices required.

---