Regularly updating assumptions about long-term care insurance (LTCI) obligations could cause new financial headaches for some U.S. LTCI issuers, according to rating analysts at Moody’s Investors Service.
Shachar Gonen and other Moody’s analysts talk about the possible effects of the new push for actuarial assumptions updates in new commentary on the U.S. insurance sector.
New Accounting Rules Near
Big, publicly traded U.S. life and health insurers prepare the main financial reports they show investors using the Financial Accounting Standards Board’s U.S. Generally Accepted Accounting Principles (GAAP) rules.
Today, under the board’s rules, life insurers predict how much insurance policies or annuity contracts will cost them when they write the business.
The board now wants insurers to move toward coming up with obligation cost forecast updates for long-lasting products on a regular basis.
Possible Rule Change Effects
For healthy, well-run life insurers, the new assumption review rules could do more to cause ups and downs in reported earnings and equity than changes in how the insurers are really doing, the analysts write.
“However, to the extent the accounting standard leads the company to take actions it would not have taken otherwise, reveals new risks, or hampers a company’s ability to raise capital, it could affect our view of the company’s creditworthiness,” the analysts write.
The major LTCI issuers have many long-duration contracts on their books, and they’re just now starting to pay enough claims to calibrate their LTCI assumptions.
State insurance regulators have been approving LTCI issuers’ requests for increases in the premiums for in-force LTCI business more quickly, and that should help soften the effects of the LTCI assumption reviews, the analysts write.
Interest Rates and Discount Rates
LTCI issuers depend heavily on interest earnings on bond portfolios, and they use interest rates to come up with the discount rates for estimating how the size of the reserves they need support their insurance and annuity business.
Falling interest rates could eventually lead to cuts in the issuers’ discount rate assumptions built into their obligation valuations, and that could cut those issuers’ earnings, or even lead to losses, the analysts warn.
But, “it is important to recognize that the recent decline in short-term interest rates does not directly translate into similar movements in the discount rate used in GAAP loss recognition or statutory cash flow testing,” the analysts write. “As discussed earlier, the discount rate reflects an insurer’s current portfolio as well as ultimate investment rates over the long duration of the liabilities.”
— Read Brighthouse Posts $1.3 Billion Q1 Net Derivatives Loss, on ThinkAdvisor.