Buying a private long-term care insurance (LTCI) may be a simple, cheap, responsible way for a consumer to bet on the possibility that U.S. interest rates could climb.
Supporting an LTCI unit could also be a way for a life insurer to allocate some assets toward businesses that could do well if rates return to more normal levels.
Tom Riekse Jr., managing general principal at LTCI Partners, an LTCI distributor, talked about the LTCI community’s dream — that rates could begin to rise in a gradual, yield-enhancing, helpful way — in a recent interview about the state of the LTCI market.
“From our perspective, things have been going well,” Riekse said.
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Most of the carriers that are still in the market, seem to be staying in the market, and the remaining carriers are eager for LTCI Partners to send them business, Riekse said.I
“They’re planning for growth,” Riekse said.
One reason the LTCI carriers are planning for growth is a sense of optimism about rates, Riekse said.
Interest rates are important to LTCI operations because writers of LTCI coverage must be prepared to take premium payments from policyholders who might not file claims for decades, and they must be prepared to pay streams of benefits that could last for years. If they sell policies that offer lifetime benefits streams, they might have to fund benefits streams that could last a decade, or even longer.
LTCI carriers count on getting much of their profit from the difference between premiums paid in and benefits paid out, but they also hope they’ll profit from the interest earnings on invested assets.
State insurance regulators encourage insurers to invest assets in bonds and other instruments generally regarded as safe, and insurers get more respect from regulators and rating agencies when they focus on government bonds and the highest rated corporate bonds rather than bonds issued by lower-rated issuers.
The lower-rated issuers — including many well-known but young or somewhat erratic companies — pay a higher rate, and that rate tends to reflect the reputation of the issuer more than ups and downs in overall interest rates. But regulators and rating analysts worry the issuers will stop keeping up their debt payments.
Since world lenders reacted to the popping of the early 2000s credit bubble by hiding their capital in financial bomb shelters, the Federal Reserve System and other central banks have tried to fill the vacuum left by the vanishing capital by keeping interest rates very low.
Rates on 10-year U.S. Treasury notes stayed under 2 percent for the last six months of 2012, and mortgage interest rates for high-rated borrowers were 3.5 percent.
For awhile, life insurers tried to downplay the effects the low rates would have on their LTCI operations and other yield-dependent operations, such as long-term disability insurance operations and annuity operations, by emphasizing that they invested in such a way that they could easily cope with short-term drops in interest rates. But it is now more than five years since the summer of 2007.
Neil Strauss, a credit analyst at Moody’s Investors Service, recently observed in a commentary that, “U.S. life insurers will be vulnerable to the impact of continued low interest rates on earnings.”