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LTCI Watch: Dear Sylvia

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The Federal Reserve Board and the U.S. Department of Health and Human Services (HHS) are quick to speak up when they think insurance companies and insurance agents are hurting people.

It would be nice if Sylvia Mathews Burwell, the new HHS secretary — and a former MetLife director — could somehow get the Fed to pay attention to the harm it’s doing to the long-term care insurance (LTCI) market, the long-term disability insurance market, and just about anyone trying to fund bills that will be coming in years for now. That thought came to mind as I was reading a Fitch Ratings commentary on the effects of low rates on life insurers.

Fed officials will say that keeping rates low helps home buyers and expanding businesses, and that the Fed doesn’t have that much effect on rates, anyway. My argument is that the Fed economists are blowing their analyses of the economy by looking only at interest rates when computing the cost of credit, not, as they obviously should, at interest rates plus the very high effective cost of forbiddingly tough credit standards. For many Americans, the true interest rate on loans over a few hundred dollars is infinity.

The view of the analysts at Fitch — one of those companies that decide whether life insurers are classy enough to borrow money — is that “a sustained low-yield environment extending from today’s levels to beyond year-end 2015 would result in an increase in negative rating actions for firms exhibiting weaker earnings profiles and diminished reserve adequacy.”

Fitch is assuming that rates will inch higher. But that was what people were assuming a year ago. Maybe HHS secretaries go to White House dinners with Federal Reserve Board governors. If so, maybe Burwell could put this excerpt from the Fitch commentary and put it on Janet Yellen’s plate:

“Prolonged low interest rates result in poor reinvestment options and an excess of low-coupon bonds for life insurers, who tend to invest in long-duration assets. Insurers focusing on fixed- and variable-annuity products, long-term care and universal life tend to be more sensitive to interest rate risk.”

If con artists were selling consumers fraudulent LTCI policies, HHS and the Fed might say something.

When Fed interest rate policies hollow out perfectly good LTCI policies, maybe HHS should say something to the Fed.


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