Long-term care insurance (LTCI) issuers have come in for another drubbing this week.
Of course, Genworth units may have been too optimistic when they designed and priced the products involved. But, when the Genworth units wrote the business, they were hoping reasonably good investment returns would help buffer them against product design errors.
No such thing happened. The Federal Reserve Board has pushed interest rates down and kept them down, for many years, without making much effort to see whether anyone but the U.S. Treasury, giant corporations, wealthy home buyers, hedge funds and select beneficiaries of select government-sponsored enterprise loan guaranteed programs could actually borrow money at any reasonable rate.
Old LTCI blocks look bad because they are the victims of the well-known risks inherent in developing a new health-related insurance product, and because, given the nature of the vulnerable people they serve, well-meaning consumer groups and regulators saddled the new products with a cripplingly rigid regulatory structure.
But, meanwhile, quietly, in the corners, insurers are using the flexibility they have in other, better-established lines to reduce sales of the products in those lines, or to sharply increase premiums in response to the low-rate environment.
LTCI sales are down a little this year, but just look at some companies’ annuity sales. You might want to talk about life-LTC and annuity-LTC hybrids as alternatives to stand-alone LTCI, but, come to think of it, scratch most talk about annuity-LTC hybrids. Writing an annuity is tough right now. Insurers are afraid to offer any guarantees at all through annuities, because, seriously, look at the miserable returns they’re getting.
People in life industry lines other than LTCI are thinking how happy they are this week not to be caught up in the talk about LTCI claim reserves, but the same rating agency bell tolling for the LTCI claim reserves is also tolling for just about any promise insurers make to help consumers save for retirement or protect themselves against any long-lasting form of risk. The bell may be tolling for you, too.
Defenders of the Fed will say the whole point of low rates is to get investors to take more risk, but regulators and rating agencies won’t let insurers take much more risk. If insurers responded to today’s low rates by jumping into the stock market, and then stocks ambled down a bit, imagine what the rating agencies would say then.