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Life Health > Life Insurance

Disability Insurance Observer: Haircut world

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Colleagues have written a great package of articles about the sad story of Executive Life Insurance Company of New York (ELNY) — a failed life insurer that was put in a woefully unsuccessful receivership.

Because of asset shortfalls, New York state insurance regulators will be cutting the income payments made to some severely disabled beneficiaries of structured settlement arrangements by as much as 60 percent.

The insureds, their families, their lawyers and the National Structured Settlements Trade Association are horrified by the haircuts.

I think one important point to keep in mind about the ELNY package is that you ain’t seen nothing yet. 

The developed countries of the world, and, in part because of regulatory pressure, their financial services companies have promised to pay out each dollar to several different people over the next few decades.

Maybe the developed country economies will somehow make good on those extravagant promises by becoming much more productive and generating many extra dollars that can be used to meet the promises.

But, if the countries don’t dramatically increase their gross domestic product growth, then countries will find that, whether inflationary tricks they pull to try to make it look on paper as if they have the right number of dollars (or euros, or yen) to make pension payments, pay for retiree health care, make good on life insurance and annuity promises, and cover the basic costs of running civilization, in reality, we may not have enough suitable houses, high-quality food, high-quality hospital beds, primary care doctor appointment slots, high-quality school seats, gasoline, electricity, defense resources, public safety resources or retail merchandise to meet demand in the way that we’d expected.

Maybe, on doctor, the U.S. economy will provide some kind of checkup appointment, some kind of housing and some kind of life-sustaining food for the typical retiree in 2040, but chances are the package won’t be what the retiree had expected. The retiree will take a financial haircut, a quality-of-life haircut, or both.

Barring that blissful, unexpected increase in real world and/or U.S. productivity, the same forces will squeeze disability insurers.

Disability insurance operations are too big, too well-established and too common, for the moment, to vanish quite as suddenly as the long-term care insurance (LTCI) operations have, but it’s interesting to see how apologetic some insurers are that they’re still in the long-term disability market at a time when interest rates are so wretchedly low.

Maybe the insurers will soldier on with their disability operations and hide the haircuts deep within  their general account investment portfolios, rather than putting recipients of disability insurance benefits in the barber’s chair.

Maybe, in the long run, inflation (or growth) will make the number of dollars insurers can pay out match what the disability insurers promised to pay out. But it looks as if some kind of haircutting will be going on, whether the hair belongs to the insurers, the beneficiaries or both, and whether the cuts come in the form of actual decreases in the nominal dollar value of benefits or (more likely) substantial drops in the quality-adjusted quantity of stuff that the beneficiary can use the benefits payments to buy.

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