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Portfolio > Alternative Investments > Private Equity

LTCI Watch: Reinsured

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When CNA Financial Corp. (NYSE:CNA) announced the “life unit” deal with Wilton Re Holdings Ltd. yesterday, that was really an individual and group long-term care insurance (LTCI) story.

I messed up: When I wrote the version of this blog, I thought the proposed deal was CNA’s way of transferring its LTCI pain to Wilton Re. It turns out that the deal does not include CNA’s individual or group LTCI business, but it is still an occasion to remember that CNA still has a big LTCI operation.

CNA recorded $1.7 billion in LTCI benefits and related expenses in 2012 and was expecting to pay $6.9 billion in future LTCI benefits, according to a regulatory filing.

That was up from $1.5 billion in LTCI benefits payments and $6.4 billion in future policy benefits on the books in 2011.

The policymakers who are still trying to talk about LTC finance seem to be dismissing the idea that private LTCI can play much of a role. My suspicion, though, is that whatever problems the private LTCI carriers have, the problems with public LTC finance mechanisms are much worse.

One major source of pain is a factor that wouldn’t have much effect on the long-term care (LTC) finance obligations that Medicaid, Medicare, and kind people who hate to see older and disabled people suffer face: Persistency. If, for example, “voluntary lapse and mortality” dropped 10 percent, that could have increased CNA’s costs by $607 million, the company estimated.

But two other factors — morbidity and the discount rate — have some effect on public LTC finance efforts and the efforts of charitable organizations and family caregivers.

In theory, public LTC finance programs with trust funds should be investing revenue and earning interest on investments in government bonds. Hah. Even if the organizations somehow have cash to park in bonds, the bond issuers have no need to pay much cash to the bond holders these days.

Then there’s morbidity. Science could really figure out great ways to reduce dementia-related morbidity drastically in the next 20 years. But, if not, that’s probably a much bigger problem for public and private aid programs — which likely will be helping a much sicker bunch of people than private LTCI carriers have insuring.

Public aid programs have one big advantage over private LTCI carriers: In theory, they may have an easier time raising taxes than insurers do with getting regulators in some states to approve rate increases. But it seems as if the states in which getting private LTCI rate increases is easy might be the states in which getting taxpayers to pay more for public LTC finance programs is hard.

It might be interesting to ask the actuaries who prepare private LTCI issuer rate increase applications to prepare a similar one for the Medicaid LTC finance program, after making whatever assumptions were necessary to make Medicaid easier to compare to a legal reserve insurance company.

My guess is that the results would show that, realistically, the government aid programs have to through some government version of what the private LTCI carriers are doing: Raise rates; cut benefits; think of creative ways to use technology and new ways of doing things to increase efficiency; and downplay expectations.

Whatever concerns we have about nursing home quality and home health care quality and LTC worker compensation that we have today, we’re not going to be able to resolve them by throwing bigger pots of government money at them in the future.

CORRECTION: An earlier version of this story described the proposed CNA deal with Wilton Re incorrectly. The deal would not include CNA’s LTCI business.

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