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Disability Insurance Observer: Zombies

By Allison Bell

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I’m changing names, details, etc. in a pretty gruesome way here, to protect the candid.

But, anyhow, a candid individual — let’s call her Jane Doe — was talking to me somewhere the other day. Let’s say somewhere was an elevator, even though that’s not the case.

She suggested that a combination of low interest rates, tough risk accounting rules, and other laws, regulations and policies have forced some big, well-known life insurers to shut down all of the operations that were bringing in much new revenue. The life insurers have big blocks of business to service and little new revenue. They are, essentially, undead, just waiting for a kindly reinsurer to come along and rescue them, or for a change in economic conditions to give the life insurers to sell again.

Jane Doe was not talking about disability insurance.

But she got me to thinking: Is the Federal Reserve System in the process of turning long-term disability (LTD) insurance business into a zombie business?

In an effort to help companies and individuals that benefit from low interest rates — including, to be fair, many people with disabilities who happen to have variable-rate mortgage loans, or who happen to be using home equity loans to keep their families going — the Fed has kept rates on government bonds at very low levels for years.

The low rates reduce the yields on the investment portfolios that LTD insurers use to generate much of the cash used to pay claims.

Insurers continue to be sell plenty of LTD coverage. No one has told me anything about seeing any noticeable shortages of LTD coverage. LTD insurers benefit from the fact that they are insuring against fairly unusual personal catastrophes, in a market in which good underwriting can help a lot and sensible insureds have no good reason to compare the value of the policy to the value of self-insuring.

But, at the same time, all of these low rates can’t be good for the LTD insurers.

I’m sure that the people at the Fed are nice, patriotic, reasonable individuals who do not deserve the kinds of attacks that some folks lob at them. They’re just doing their best to keep the country creeping along as Congress dithers.

But how carefully are the counting the zombie companies they’ve already formed, and the zombies of the future? How sure are they that the benefits of the course they’ve chosen outweigh the difficulties that could be associated with creating a large number of businesses that are just numbly going through the motions of operating, hoping wordlessly for the day when interest rates rise and bring them out of a miasma in which they really are too big and, possibly, on paper, too solvent to fail but to hemmed in to sell anything?

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