Premiums for insuring against the cost of long-term care in old age are likely to rise sharply, after announcements this month from the two leading providers that they will no longer sell policies. The withdrawal of Norwich Union and AXA leaves only Scottish Widows, BUPA and Pension Annuity Friendly Society offering such policies.
"Two of the largest insurers in the world can't make it pay," Owain Wright of the specialist adviser, the Care Funding Bureau, says. "They want scale, which this market can't give them." He believes so few people are willing to buy the policies, which pay for long-term care in a residential home or in a person's own home, there is a serious risk that within a few years there will be no providers.
A spokeswoman for Scottish Widows admitted it had not decided whether it would continue to offer care policies. "We have no plans to withdraw from the long-term care insurance market, but we are reviewing our position," she said. BUPA insists it will continue to offer the policies, but it has stopped selling immediate-needs care plans. People now seeking accommodation in residential homes owned by BUPA, the largest provider of residential care in the country, will have to arrange their financing elsewhere.
At the beginning of August, the most popular of all products in the market, the Scottish Amicable long-term care bond, was withdrawn. Sales had dropped and the insurer realised this investment bond, purchased by one-off payment, was not producing the required returns to meet the cost of the insurance premiums it was designed to cover.
So far, 1,800 policy holders have had letters from Prudential (which now owns Scottish Amicable), advising that they must either make extra contributions or accept a reduction in cover. A further 5,200 similar letters go out over the next year. Holders of bonds who believe they were not properly advised of the under-performance risk attached to the investment may lodge a complaint for mis-selling with the firm that sold the product.
But the withdrawal of so many products will have only a marginal impact, because the long-term care insurance market never took off. William Laing, of the analyst Laing & Buisson, doubts if it ever paid for more than about 1 per cent of residential care accommodation. This compares with about 70 per cent of care beds paid for by local authorities.
Councils meet the costs of residential care where an individual has capital of less than £12,000. Residents must fully self-pay if they have capital above £19,500. People with between £12,000 and £19,500 in funds must contribute part of their accommodation costs. The value of the family home is not included in a person's capital when assessing their ability to pay if it remains occupied by a surviving partner.
The proportion of people meeting the full costs of residential care is expected to increase massively within decades. More than 60 per cent of people now reaching 65 own their homes and most of them will have to meet the full costs of residential care if they require accommodation at some point, typically after the age of 80.
People who have not pre-paid residential care through insurance will normally have to meet the costs by obtaining an impaired-life annuity, paid for from the proceeds of the sale of the family home. Because the annuitant's life is regarded as impaired and therefore not likely to continue for long, the provider can afford to pay higher returns.
But it is important to shop around when seeking one of these annuities, because different providers may quote very different costs. One relative of Philip Spiers, of the specialist adviser Nursing Home Fees Agency, was quoted £23,000 by one company and £120,000 by another, despite the two companies being provided with the same information on the individual and his condition.
But Mr Spiers complains that there are devices to hide capital to avoid triggering the need for self-payment, by placing capital in investment bonds with associated life assurance. He has asked the Department of Health to change its rules so the bonds are treated as part of a resident's capital, but the department insists on treating these as life assurance.
Mr Spiers says: "Nobody really wants to pay for care. You have to have a means test because that is the only way to be fair, and if you are going to have a means test it has to be fair and equitable."
There is another serious complaint about unfairness in the care-home sector. The 30 per cent of residents who self-pay each contribute about £50 a week more for their accommodation than do local authorities, showed research last year by Laing & Buisson. This reflects the much stronger buying power of councils, which can force care-home owners to charge them less.
Apparently, those owners are forced to cross-subsidise council-paid residents at the expense of self-payers. In many cases, relatives must top up the fees for self-payers from their own savings.
This month, the Consumers' Association and 28 charities, including Age Concern and Help the Aged, lodged a joint complaint to the Office of Fair Trading, claiming local authorities are guilty of market abuse in the residential care-home sector.
They also say, that although local authorities have a requirement placed upon them by the Department of Health to manage the residential care market, there is a "lack of accessible and reliable information on care homes", preventing the elderly and their relatives from making informed choices. The result of the complaint could be a full market investigation, which may, eventually, force local authorities to pay more for care they buy.
But despite the risk of a high cost of care for the elderly and the prospect that growing numbers of an increasingly elderly population will find themselves needing residential care, there is no enthusiasm to pre-pay through insurance.
"The major reason why this market has not worked is that most people haven't given it any attention," Mr Wright says. "The growing demand is immediate need after people can't leave it any longer, having stuck their heads in the sand for years."
* Nursing Home Fees Agency, 0800 998833
* Care Funding Bureau, 0800 718 333