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Financial Planning > Behavioral Finance

LTCI Watch: Run

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The Wall Street Journal noted last week in an editorial, behind a paywall, that the Federal Reserve has bank regulators crawling all over MetLife Inc. (NYSE:MET) looking for evidence of some kind of risk that would justify classifying the company as a systemically important financial institution (SIFI).

The regulators’ idea is that, given the events of 2007 and 2008, maybe there’s some kind of creepy-crawly risk inside MetLife that could pop out in a moment of crisis and reduce other financial services companies to a smelly green ooze.

See also: IAIS: Insurers Are Not Banks

MetLife would be eligible for government help in an emergency. In exchange for that help, it would have to pay a capital charge on product lines that regulators view as especially risky. One of those especially risky product lines is said to be long-term care insurance (LTCI).

One oddity about classifying LTCI as the kind of product that might lead to runs, or other system-destroying crises, is that one of insurers’ big problems with managing blocks of LTCI business is that the policyholders have been much more likely than expected to cling to the policies. LTCI issuer executives have reported that policyholders have generally kept policies in force even in the face of big premium increases.

Another oddity is that the bank regulators are alarmed about the possibility that LTCI could somehow contribute to a run on financial institutions but, apparently, not especially interested in the near inevitability that, if scientists do not come up with a reliable strategy for preventing, curing or controlling Alzheimer’s disease within the next 15, the baby boomers are going to start turning 85; using a large amount of long-term care (LTC) services; draining cash from private insurance policies, private savings, private investments, relatives’ resources, and government resources to pay for formal LTC services; reducing loved ones’ capacity to work at an appropriate level outside the home; and drawing paid workers into the LTC sector, from other sectors that might do more to sustain our access to the necessities of life, such as food and water.

To keep MetLife from leading to a lightning run on the financial system through some difficult-to-envision mechanism in a year or two, the Fed wants to push MetLife…away from trying to prevent a slow, steady, insidious, easy-to-envision “crawl” on the financial system in 2030.

To quote Snoopy’s friend from Peanuts, Linus, “B-blanket… need… blanket…!!”


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