Elderly Social Care (Insurance) Bill [HL]

Charley Coleman

a younger person's and older person's hands - social care funding

The Elderly Social Care (Insurance) Bill [HL] is a private member’s bill sponsored by Lord Lilley (Conservative). It is due to have its second reading on 16 July 2021. The bill consists of 11 clauses.

Background and purpose of the bill

The purpose of the Elderly Social Care (Insurance) Bill is to establish a government-owned company to provide insurance for homeowners against having to sell their homes to pay for elderly social care. The body would reimburse local authorities for the cost of social care provided to policyholders.

Lord Lilley argues that social care provides two competing challenges to governments:

the increased pressure on local authority social care budgets that comes with an aging population, increases in the national living wage and the risk of care homes closing; and
resentment from homeowners (and those set to inherit those properties) who risk having to sell their homes to pay for social care which is “politically very potent”.

He has said that both problems could cost “billions of pounds to solve”. However, the more spent on “placating homeowners, the less finance can be made available to provide decent care for those in greatest need”.

Lord Lilley has argued that whilst private insurance has been considered as a way of meeting these challenges, private insurers will not provide insurance policies “partly because of the risks of government policy changes and medical advances, and partly because homeowners will not pre-pay insurance on top of funding their pensions and repaying their mortgages”. Lord Lilley has argued that normally state provision would be an “unattractive option” because of potential inefficiencies. However, he believes that this cost is small compared with the cost of the state “actually funding care for owners of large houses so that their heirs can receive a large legacy”. There would also be no private provision with which the state would be “unfairly competing”.

In his paper Solving the Social Care Dilemma? A Responsible Solution, published by Civitas, Lord Lilley has summarised how his proposal would work:

A not-for-profit company entirely owned and guaranteed by the state would be established.
The company would offer everyone, when they reach state pension age, the opportunity to take out insurance to meet the cost of social care (up to the standard level provided by local authorities), should they ever need it, instead of having to sell their home or other assets.
The cost of such insurance would be calculated to be actuarially sufficient to pay for such care. So, the insurer would aim to operate at no long-term cost to the taxpayer.
People would be able to pay for the insurance by a charge on their home which would be realised when they die and/or the home is sold.
Typically, that charge would be a modest fraction of the value of any home.
Nobody would be required to take out such insurance.
Those who do pay the premium would be confident that they could leave their home and other assets to their heirs—who would be able to look forward to such bequests with greater confidence.

Lord Lilley has said that the aim was not to achieve the “widest possible take up”. The purpose is to provide a new option and “thereby weaken the political pressure from homeowners for the state to provide them with free social care”.

Overview of the bill

Clause 1(1) of the bill would require the secretary of state, by regulations, to establish a public not-for-profit company owned by the government. The company would be called the Public Social Care Insurance Body (the body). This would have to be done within two years of the bill being passed. Under clause 8(2) the secretary of state would be able to give financial support to the body through loans, grants or other payments. The body would also be able to borrow from the secretary of state “both temporarily, by way of overdraft, and longer term” (clause 8(3)).

Clause 1(2) would set the following purpose for the body:

The purpose of the body is to provide homeowners in England with the option of purchasing insurance from the body against the risk of needing to sell their homes to pay for elderly residential social care in England.

Under clause 1(3), people would not be made to buy insurance from the body. Homeowners who chose not to do so would “continue to be subject to existing regulations regarding the provision of social care”.

Clause 7 defines a “homeowner” as:

[A] person who owns a residential property and would, without insurance from the Body, be eligible for financial support with the costs of elderly residential social care from the local authority once their income and assets fell to the relevant means test threshold.

The cost of the insurance

Clause 2 would make provision for setting the cost of the insurance. The body would be empowered to set this cost. The body must annually assess and publish the premiums necessary to meet the cost of insuring properties for a schedule of residential property values. Clause 2(3) would require that in calculating the premiums the body would have to consider the following:

[T]he proportion of homeowners in England who are eventually assessed as needing elderly residential social care, the lengths of time that homeowners stay in elderly residential care receiving social care, and therefore the additional cost to local authorities of providing social care for the periods which the insured persons would otherwise have been required to finance up to the value of their insured property, based on current costs of social care at the time of calculating the premiums.

Based on updated figures for calculations from the Dilnot Commission, Lord Lilley has estimated that a theoretical premium would be approximately £16,000. This is based on:

one in four people needing social care after reaching pensionable age;
an average stay of two and a half years; and
the average cost of social care supported by local authorities being £25,000 per year (excluding ‘hotel costs’: costs, other than the cost of social care, of occupying a residential care home, such as accommodation and meals).

The premium is calculated as follows: ¼ x 2.5 x £25,000. However, this simplified figure does not include other factors such as administrative costs.

The body would have to consider the goal that over the long-term, income from the sale of insurance policies should meet the cost of funding social care for insured persons and the body’s own administrative costs (clause 2(4)).

A homeowner in England would be able to buy insurance for one residential property they owned (clause 2(5)). The body would be able to value the property (net of mortgage) at “current market prices at the time of the policy being purchased”. The bill would also make certain provisions for married couples or couples in civil partnerships to buy a joint policy (clause 2(8)). If the property to be insured is owned by such a couple, then neither person may buy a policy other than a joint one (clause 2(9)).

The body would set the cost of buying the insurance policy as a charge on the property “set at a fixed fraction of the value of the property, net of mortgage” (clause 2(6)). The fraction would have to be “set equal to the premium for a residential property of that value divided by its value” (clause 2(7)).

The body would not be able to consider the health or health-related circumstances of the homeowner when it sets the cost of the policy (clause 2(10)). Clause 2(11) would require the secretary of state to make regulations setting whether the body could set a premium that takes into account the sex of the homeowner. In his paper on social care, Lord Lilley cited a report from 2011 that estimated the average cost of residential care for women was 2.5 times higher than for men. Lord Lilley said that “in a normal market, the premium would therefore be markedly different for women and men”. He argued that in similar cases in other areas “public policy has tended towards preferring uniform premiums regardless of sex”. However, Lord Lilley noted that this would mean that a single woman who owned their own property “would benefit from a premium which did not reflect the true expected cost of their care and/or single men with property would have to pay over the odds”.

Paying for the insurance

The body would be able to realise the charge on the property on the death of the insured person or on the sale of the property. The charge “being the fraction, set at the time of the purchase of the policy, of the value of the property at the time of the death or sale, net of mortgage” (clause 3(1)). The body would be able to accept a cash payment “equal to the premium calculated under section 2 at the time of the policy’s purchase in place of the charge on the property” (clause 3(2)).

Entitlement to elderly residential social care

Clause 4 would make provision relating to the entitlement to elderly residential social care. Clause 4(1) would provide that insured persons were entitled to social care from their local authority and that the body would reimburse the cost of the care to the local authority:

The policyholder, if they develop a requirement for elderly residential social care as assessed by their local authority, is entitled to receive the elderly residential social care provided by their local authority that they would have received if they did not own assets or income greater than required to pay their “hotel costs” (costs, other than the cost of social care, of occupying a residential care home, such as accommodation and meals), until the cumulative cost of that social care equals the calculated value of the insured property, and the Body must reimburse the local authority for the cost of that care.

The calculated value of the property would be the initial value when the policy was agreed “as enhanced by the increase in an index of house prices for each year since the policy was purchased” (clause 4(2)). The secretary of state would be able to specify one or more valuation methods and indices for this purpose in regulations (clause 4(3)).

Clause 4(4) would provide that once the cumulative cost of the social care provided exceeded the calculated value of the insured property, only assets and income other than the property could be taken into account for assessing entitlement to support for elderly residential social care of the policyholder. If these assets became depleted below the threshold for means testing “the policyholder shall become eligible for financial support with the costs of elderly residential social care from the local authority, which shall not take into account the value of the insured home” (clause 4(5)).

Holding an insurance policy would not affect the holder’s right to nursing and other health care provided by the NHS for those in residential care. Policyholders would still have to fund (from their own income and other assets) the hotel costs of the care home. Lord Lilly has said it can be argued that most people “would expect to continue to pay for their accommodation and daily living costs from income and would not want or need to pay for insurance to cover such costs”.

Timing

The bill would make provision for people to be informed of the option of taking out insurance in the run up to them reaching state pension age. Clause 5(1) would require the secretary of state to attempt to contact residents in England twice per year in the two years running up to them reaching state pension age and in the two years after. Homeowners would only be able to take out insurance with the body after reaching state pension age and within two years of passing it (clause 5(2). Transitional provision would be made for those people who had already reached state pension age at the time the body was established (clause 10(2)).

Lord Lilley has said that the timing was designed to avoid the risk of ‘adverse selection’, that is “people delaying a decision about whether to pay the premium until they sense that they will soon need social care”. Because the premium could be paid via a charge on their home, people would not have to save during their lifetime, and they would not be “materially out of pocket by taking the decision soon after retirement”.

The bill would come into force on the day on which it is passed, and it would extend to England and Wales.

House of Lords debate on social care

The House of Lords debated social care provision and the role of carers on 25 June 2021. Lord Lilley spoke during the debate and made reference to his private member’s bill. He asked the Government whether it was considering the option of insurance provided by the state.

Responding, Lord Bethell, Parliamentary Under Secretary of State at the Department of Health and Social Care, said long-term reform of the financing of social care “absolutely” remained a priority for the Government. He said “all options are being considered, including those of my noble friend” and that the Prime Minister would make an announcement before the end of the year.