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LTCI Watch: Safe returns

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I think some of the key enemies of U.S. civilization as we know it might actually be the nice, caring, intelligent, creative, honest, generally terrific people who make sure insurance companies and pension plans invest in what is thought to be a prudent fashion.

This thought came to me recently at the Intercompany Long Term Care Insurance (ILTCI) Conference, as I was trying to wrap my head around the idea of Medicare or Medicaid jumping into long-term care (LTC) finance, and doing more to pay for LTC services without pretending that they’re just paying for small amounts of post-acute care, or just participating in a limited pilot program for a limited group of people.

Of course, one of the biggest problems LTCI issuers face right now is that the Federal Reserve Board is pushing investors to invest in riskier classes of investments by holding short-term interest rates near zero.

Insurance companies pretty much have to invest in ultra-safe corporate bonds that are paying just a little more than the U.S. government. Because, otherwise, those kind, sensitive, intelligent, wonderful people at the rating agencies and regulatory agencies who police insurance company investment portfolios would write beautifully written but stern commentaries. 

See also: NAIC Panel Looks at FDIC-Backed Notes

If the federal government would expand efforts to, quite sensibly, set money aside for the cost of baby boomers’ future LTC needs, it would probably park the money in what are supposed to be very safe, low-rate investments, mainly, government bonds. 

The result is that any corporation with a high enough rating to get its bonds into insurance company and pension fund portfolios, and any government agency that issues bonds that are popular with insurance companies and pension funds, has an unfair edge when it comes to borrowing. For example: XYZ Giant Insurance Company, and consumers with spotless credit records, who can qualify for government-guaranteed mortgages, can borrow money for free, while other players, such as insurance agencies that want to expand their agencies, are all but shut out of the credit markets.

In other words: What look like the safest investments available are probably becoming relatively dangerous investments, because, once a borrower gets itself classified as safe, it faces almost no scrutiny. It can invest in stupid projects, and investors and analysts will smile and say, “Oh, that’s OK. If that bridge collapses, or that health app writer incubator crumbles, the issuer will just print money, and everything will be fine.”

Meanwhile, if the federal government and state governments set aside more assets to fund boomers’ retirement costs, the percentage of the assets in the whole economy going into the allegedly safe government bonds will rise.

See also: NAIC Panel Questions Reliance On Rating Agencies

Regulator-whipped insurers might struggle a little against their constraints and try to find ways to invest money in the livelier blue chip companies.

In the brick-and-mortar world, live-human 65-year-olds might sputter at the near-zero returns they get from “safe investments” and start allocating money to small-cap stocks or low-rated bonds. In other words: To companies that might be trying to do new and interesting things.

But, overall, the nation’s portfolio will look more and more like the portfolio of a 65-year-old robot that does its best to invest in increasingly foolish mortgage guarantee programs, increasingly foolish student loan guarantee programs, increasingly foolish programs to shore up banks, increasingly poorly planned public works programs, and other dull but “safe” investments.

To me, it doesn’t sound as if the dull and dumb investment allocation system will get us where we want to go.