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LTCI Watch: Cyprus

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Marc Faber, an investor and publisher who is almost as gloomy as I am, made a splash Tuesday when he said on CNBC that the kind of bank failures that have just occurrred in Cyprus could occur anywhere in the world.

He pointed out that 5 percent of the world’s population holds 92 percent of the wealth.

In other words: Our world is an awful lot like the world in The Hunger Games. Maybe the the Academy of Motion Pictures Arts and Sciences stiffed The Hunger Games at the Oscars partly because the kinds of folks who vote on the Oscars are, in effect, the residents of the Capitol of Panem.

I don’t want to create any spoilers, but I think it would be fair to say that, for many reasons, it would be difficult for a producer to sell annuities or long-term care insurance (LTCI) in Panem.

But, on the other hand: The world has always been pretty unfair. It’s not clear that it’s all that much more unfair in a negative way than it used to be. To me, it seems as if the world is “more unfair” because the rich are richer, not that the poor are all that much poorer than they were 100 years ago.

To the extent that, in some places, the poor are more poor, I think that has mostly to do with people who know very well that they’re being obnoxious, violent pigs being obnoxious violent pigs, not with any conscious, organized effort by the rich to keep the poor down. One of the strangest things about the actual Wall Street arm of the Occupy Wall Street movement is that the protesters were, in a lot of cases, yelling at rich 1 percenters who had given generously to Democrats, and, in some cases, to Greens.

My guess is that most of the 1 percenters who were to the right of the protesters sincerely thought that their philosophy would do more to help the poor. I question whether anyone can really come up with 10 rich Americans who truly want to keep poor people poor, on purpose.

So, why do most have so little, and a few so much?

One reason is that, of course, even though few people consciously think of themselves as wanting to rig the system in their favor, people who get a chance do so all the time, with gusto. 

Many rich people are lucky, talented and driven, and they have fun seeing a big number in the net worth cell of the spreadsheet.

Some rich people want to have enough money to enjoy expensive hobbies, such as owning palaces and sending people to Mars; to make their descendants rich; and to support their favorite nonprofit organizations.

But, then, even rich people worry about financial security. Plenty of rich people have died poor. Rich people can lose money because of overspending, fraud, outright theft, the collapse of banks, confiscatory tax policies, political persecution, riots, war, natural disasters, or the collapse of countries or entire civilizations. Maybe it will take having $1 million in cash to buy a cup of coffee in 2050. Who knows?

Of course, many people of modest means end up looking rich on paper, simply because they or professionals have managed their pension or retirement savings arrangements well.

Cyprus still has sunshine, beautiful beaches, educated people, houses, apartments, and whatever other resources it had before the periods of booms and busts began. Maybe it won’t have quite as many designer handbags per capita in a year as it had at its peak, but whatever the bank failures do to the residents’ net worth, chances are that buyers and sellers will find some new equilibrium. Most people in Cyprus will end up with roughly the right amount of stuff they need to get through the day.

What the middling-rich people in Cyprus who were seriously hurt by the bank failures won’t have is the kind of money that could give them confidence about knowing that they can have a nice apartment on the beach throughout their retirement, or enough money to pay for round-the-clock home long-term care (LTC)  services for a few years without caring too much about the bills.

People will have roughly what they need in a year to get by — but they may not have enough stuff when they’re old and frail and unable to do much to bargain for better deals.

I think one lesson is that, gosh, maybe if a lot of the world ends up looking like Cyprus, having paid money for long-term care insurance (LTCI) from a company that’s prudent, closely watched by regulators and backed by a guaranty fund will turn out to be a much safer course of action than putting the money in a bank. Maybe, for example, just the fact that regulators can protect insurers from the kinds of sudden runs that empty banks will provide some protection.

Another lesson, I think, is that insurance company executives and regulators ought to be somewhat paranoid and think about Cyprus when they’re coming up with tail scenarios (hypothetical examples of what could happen when the world goes to heck).

Of course, agents, in the back of their minds, think, “Well, everything will be OK, because the company is backed by the guaranty fund.” But, once you poke around guaranty fund websites, you see that they don’t want folks to tell consumers that the guaranty funds exist, because the guaranty funds themselves aren’t all that sure how well they’ll exist in a cataclysm. They’re built more to handle the end of one lousy company than to handle the end of the world.

I, as a layperson who’s read scary draft tail scenarios posted on the website of the National Association of Insurance Commissioners, think that the actuaries have been good about being paranoid. But, I’m just a reporter. I don’t know. Maybe it would be good to get a lot of bears in to see if the tail scenario planning is really bear resistant. Even if all companies couldn’t live up to 100 percent of their promises in Cyprus scenarios, could they at least meet a good percentage of their obligations? Maybe, in that situation, getting something would be a lot better than getting nothing.

Finally, even though it’s important that the managers of the portfolios backing the LTCI policies (and annuities, and other products) think about cataclysmic risk, I also think that everyone should try to think about what a simplistic, one-company-oriented perspective on portfolio risk does to our society’s overall level of risk.

Right now, it seems as if almost all insurers can really invest in is various types of government bonds, extremely safe corporate bonds, and extremely safe mortgages. If the government regulators and rating agencies do too much to keep insurers and other financial institutions from helping to finance new businesses, small businesses, and consumer finance, what does that do to the network of small buyers and sellers that might help the economy recover from the kind of problems facing Cyprus?

Maybe there’s a better, safer option for protecting general accounts against systemic risk than pressuring insurers to park all of their assets in Walmart bonds and securities backed by mortgages issued to high-income people who are trading up from their starter homes. 

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