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Chancellor Rishi Sunak has asked the insurance sector to consider new products to enable people to fund future social care costs. Writing for the ICAEW Financial Services Faculty Adam Leach explores the possibilities.

“Somebody told me that life can get better with age,” says the friendly and familiar lilting Irish voice of daytime TV stalwart Eamonn Holmes as he pops the kettle on in a pastel-coloured kitchen, dressed in a pink shirt and light blue blazer. 

Pondering the premise with some quips about a creaking back and aching knees, he reveals to the viewer that the penny then dropped.

“By releasing some tax-free money from your home with Age Partnership, you can make home improvements or even reopen the bank of Mum and Dad,” he explains, before closing out the 40-second advert with the tagline, “So life really can get better with age.”  

The product that Holmes and Age Partnership are pitching in the advert is an equity release mortgage, which as Holmes explains in a tone not usually associated with such grave matters, is a loan that is secured against your property and only repaid once you “have passed away or been moved into permanent care”. 

The market for such products has grown rapidly in recent years to reach £1.4bn per year and is expected to undergo even greater growth over the coming decade to reach an annual market size of £9.4bn.  

But while Holmes and Age Partnership should probably be criticised for suggesting that such products are suitable as a means of lending yet more money down the generations, they are at least offering something to fill the void that has been left by more than two decades of government inaction on the costs of social care.

Two decades of failure to act on social care  

Since the dawn of New Labour in 1997 through to today, successive governments have promised to fix the system and reform the provision of later life care, without ever actually following through. There have been two separate commissions set up to tackle the issue: a Royal Commission in 1999 chaired by Sir Stewart Sutherland and the Dilnot Commission of 2011, but even though both concluded that greater state funding was required, that the thresholds of means tests should be increased, and that costs should be capped, neither has been enacted in any real form.  

Green papers and white papers have been published in the Commons Library with positive and well-meaning titles that might suggest of progress such as ‘Independence, well-being, and choice’ and ‘Our health, our care, our say’, but have realistically just been gathering dust. 

However, it appears that today there is at least the beginnings of progress, with the government announcing some concrete proposals that in theory will alter the landscape for adult social care costs.

A cap on costs is finally on the horizon 

Published on September 6th, Build Back Better: Our Plan for Health and Social Care, included a number of measures ostensibly intended to limit the cost, support those without substantial assets and improve the provision of services.

To do this, a new health and social care levy, which will initially be awarded to the NHS, will be redirected towards social care from October 2023 to provide an additional £12bn a year in funding.

Further, the two-decade long wait for a cap in social care costs, will finally conclude, with individual personal care costs being capped at £86,000, with the state picking up costs above it.

And changes will be made to increase the support provided to those with the least money available to support themselves by ensuring that those with assets below £20,000 will receive full state funding and those with less than £100,000 of assets will receive increasing levels of assistance as their value slides down the scale.

But in order for such policies to succeed, and for the Prime Minister to follow through on his promise that nobody will be forced to sell their home to pay for their care, the Treasury has called for insurance sector to develop  products that provide surety over the costs before the cap comes in and also to cover those costs not deemed as contributing to the cap - which remains the great unknown of the policy.

Insurers are unconvinced of the potential for new products

With the previous attempt to establish a market for private care insurance having failed to the point of extinction, the options currently available are essentially confined to just two products: an Immediate Needs Annuity – which takes the form of a large one-off premium that is typically upwards of £80,000 and accounts for all care costs, and the far larger and broader Equity Release Mortgage market, which seeks to securitise the money lent against equity in the borrowers home.

According to Stephen Lowe, group communications director at Just Group, which specialises in equity release and lifetime mortgages, the development of new products is all well and good in theory but far less enticing in practice.

“Insurance works on pooling risk, it works on the law of large numbers, so if you can have a market that is 30 or 40 million people big then it is possible that you could create what is a pure risk based insurance product,” he tells The ICAEW.

“If the insurer has good data and can pool that risk across millions of people then it is potentially viable, but those conditions don’t exist and there isn’t a market where people want to buy it,” he adds and explains that people would just rather gamble that it won’t happen to them.

This unwillingness to face up to the prospect of requiring costly care has stretched from the individual who would rather hope for the best, to the family who find it to awkward to discuss and as a result plan for, to the politicians and institutions who rather than engage in reasonable and responsible debate, have very quickly descended into attacks of ‘mansion tax’ and ‘dementia tax’ whenever a potential solution has been proposed.

Whether the cap fits

Will Hale, CEO at Key, the largest equity release advisor in the UK, tells the ICAEW that he welcomes the direction of travel that the current government appears to be taking and is hopeful of a change in approach: “Social care has for too long been quietly put to one side as being too difficult to deal with so it is fantastic news that the Government has committed to change.”

However, he is clear that there is still a note of caution being struck within the insurance industry until more has been revealed. “The devil is in the detail and until we actually know what to expect in 2023, I suspect people are going to be sceptical.”

One of the key details that Hale and his counterparts are most keenly awaiting is just what costs will contribute to the £86,000 cap and what won’t. 

While the government has so far remained tight-lipped about what it envisages, much of the speculation suggests that it will be quite a strict definition in terms of care costs such as nursing and medical treatment, with the personal costs such as accommodation or home alterations remaining uncapped.

Should such a scenario prove to be true, then the total costs spent by individuals up to the point that the cap is met could continue to be very high.

According to internal modelling carried out by one company that spoke to the ICAEW, the amount spent by an individual up to the point the cap is reached could be as high as £400,000.

An independent health think tank told The ICAEW that it believes the cap will likely be reached after around four years of care, which would be welcome in the case of conditions such as dementia where the sufferer requires care but can live for a long time but less so for those whose condition worsens more rapidly.

Equity release will remain the main option

As a result, the consensus in the insurance sector appears to be that the need for individuals to contribute significant sums to cover their care costs will continue.  And should that prove true, then they are adamant that the potential of any new products will pale in comparison to the £3.6trn of equity currently locked up in the homes owned by those aged over 50.

“Products like equity release are already being successfully used to support customers later life care needs so I would argue that it is less about innovation and more about education,” says Hale, who believes that as the care system becomes more cohesive and the overall costs become clearer, then people will be more inclined to act earlier. 

“This in turn will see more interest from advisers and firms eager to support this growing market with innovative products and approaches,” he adds.

Taking a more hands-on approach

One aspect where innovation is already under way is the use of medical underwriting, whereby medical information and lifestyle factors are disclosed to the potential lender in return for the prospect of a lower interest rate or the ability to borrow greater sums of money.

This is part of a broader effort to try and tailor equity release mortgages more closely to individual circumstances rather than a standardised model, and is now being offered by Aviva, specialist lender More2life, and Just Group.

Explaining that Just Group honed its medical underwriting approach over a number of years by adding it to its annuity portfolio, Lowe believes that it will be transformational for the sector.

“If financial advisors are not asking their client about their medical conditions and lifestyle then they cannot attest to giving them the best deal,” he says. “This is going to totally change the way business is done in the lifetime mortgage area with better, fairer value.”

At the same time as the insurance and equity release industry is starting to take a more hands-on approach in relation to the health and individual circumstances of those seeking to utilise their products, it is also in the early stages of evaluating whether it could also take a more active role in the provision of the services required by people to receive their care needs in their own homes.

“Lifetime mortgages release cash in order to finance certain needs,” says Lowe, who describes the concept as essentially having the benefits of a retirement village without needing to move to one. “So if you take that and put a service on top of it which will then provide a solution to each of the vendors and guarantee them payments for the next 10 years then that will provide a different kind of reassurance.”

Suggesting that pilots of such approaches are already underway – possibly within Just Group itself – Lowe is clear that this is the direction of travel that the insurance sector foresees.

Whether or not this future will materialise, will likely owe more to the unknowns of the current proposals such as how much of a cap the cap is, and where the line is drawn between care cost and hotel cost, but given that insurers typically make their money on assessing historical trends, then the past two decades of failings to address the issue may well have given them something to work with.