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The Eleventh Hour

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Unless you have been busy following the death of Amy Winehouse, the fallout from the Caylee verdict, or News Corp.’s blowback from the News of the World phone hacking scandal, you might have noticed that there is bit of a financial debate going on in Washington, these days.

The current debt ceiling talks that have consumed Washington and a good chunk of mainstream media coverage for some time now, continue apace, and will not stop until 11:59 pm on August 1, most likely. At stake, of course, is the United States’ ability to pay bondholders and other debts unless it allows itself to borrow more money before August 2, when certain debts come due that the government simply does not have the money to pay. As the BBC points out, raising the debt ceiling is something our government has done many times before without a fuss, only now staunch resistance from the GOP has turned this process into a political flashpoint.

It is not hard to see how this has all come about, as attacking the debt ceiling is a roundabout way of trying to apply the Congressional de-funding strategy to things like health care reform and financial services reform, a strategy the GOP has long considered as a fallback option once it became clear that the Republicans did not have the political strength to block either regulatory package. The popular selling point is that President Omama and the Democrats have been on a wild spending spree and must be stopped before they bankrupt the country. When one looks at the current federal budget, however, it might be tempting to point out that the same argument could have been applied to the dramatic military spending we have seen over the last 10 years.

But that is also a bit like comparing apples to oranges. The point is, the United States can live with a debt ceiling increase; the question to resolve is whether it really wants to or not. If it does, then life goes on under an even heavier debt load. But if it does not, then it will default, and that carries with it some pretty serious economic reverberations that will further complicate an already difficult recovery from our long recession. (Anyone who doubts it can take a look at Wall Street’s jitters over the prospects of a default.)

This matters to the life and health world on two fronts. The first, and less important, front is that a defaulted government and the havoc it would play with our economy would doubtlessly impact sales for the L&H industry. Low retirement planning and  individual life sales in particular have been blamed in part on a poor economy. As people must prioritize their finances, things like extra insurance tends to get short shrift, and understandably so. People are still under-insuring themselves, which is most unwise, but when it comes down to making a mortgage payment or keeping a life policy in force, folks are probably going to go with the mortgage payment.  And while life sales have begun to show signs of recovery (and annuity sales are going great guns), a default could possibly put the brakes on all of that, which is not what the L&H industry really needs right now.

But honestly, I don’t think that will happen. Chances seem most likely that a deal of some kind will be hammered out, and perhaps at the 11th hour (literally). And therein lies the second front where this situation might bite the L&H industry in the face. For years, the tax incentives built around life insurance and various retirement planning vehicles have been wonderful things, promoting people to save and to financially prepare, while either deferring taxes or relieving certain kinds of transaction from taxation altogether. This system works. It provides a deep undercurrent of financial stability to our economy, especially to our middle class, which has propsered incredibly in recent generations, thanks in large part to the generational transfer of wealth afforded to it by the L&H industry and corresponding tax incentives. Nobody messed with this because the system made sense, and in a vibrant economy, there is little need to fix what is not broken. That might change, however.

As debt reduction plans have come and gone, so too have suggestions that the tax structure of life and retirement products receive a second look as a way to generate more government revenue. Thankfully, none of these plans has gained serious traction as yet, but the mood in Washington right now is simply unhinged. The tension on Capitol Hill is so thick it can be cut with a knife, my Washington correspondent tells me, and as we get closer to D-Day (D is for default), the possibility looms that whatever plan the Democrats and Republicans hash out might just include a hastily written and tacked-on provision that could have massive implications for the tax structure of life and retirement products. As one life executive I spoke to this week put it, it would be a short-term solution that creates a long-term problem for life insurers. And what is worse, once the economy gets rolling again, it is the kind of thing Washington would be loathe to go back and correct. It is one thing to pass a law. It is something else to revise it, and somehow the second always seems to take way more effort and political will than the first. A bull never stops to turn around and fix up the china shop it just charged through.

So far, the L&H industry has proven to be politically resilient against things like Rule 151A and what appears to be an ongoing effort by federal regulators to consider annuities as a securities product rather than as an insurance product. And it has also proven itself to be politically influential, as it was when AHIP and carriers such as CIGNA contributed heavily to the Congressional effort to overturn health care reform. But the debt ceiling talks are moving at a rapid pace and whatever deal we all must live with is so protean at the moment, that there really is no telling what the L&H industry will have to live with come August 2. It would be comforting to think that the Republicans especially have the industry’s best interests in mind as it negotiates, but there can be no counting on that. All that matters, ultimately, is an agreement both sides can walk away from without feeling that they have scuppered their re-election chances. If that comes at the lasting expense of the L&H industry, despite the obvious good it does for the American people and the economy, I suspect that might be a cost worth bearing, in the eyes of Washington.

The life industry so rarely has to contend with sudden and unpredictable disasters, as the property & casualty industry must. Perhaps federal regulators are that risk for life insurers, posing a kind of risk that cannot be priced or reserved for. How frightening it is that the life side of insurance is the more unpredictable side, at least for the moment. It never should be, but here we are anyway. Let us hope that come August 2, we can collectively feel that the industry has dodged a bullet instead of caught one.


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