We spend a lot of time talking about the various state and local public pension ponzi schemes around the country that will inevitably wreak havoc on the global financial system at some point in the not so distant future. As we pointed out in a post entitled "Study Of 10-Year State Pension Returns Highlight Full Extent Of Public Pension Ponzi," most well-meaning public pensions go full-ponzi by perpetually manipulating one small variable: discount rates. While setting a high discount rate artificially reduces the present value of future retiree payments, thus making a fund look more 'funded' than it actually is, when actual asset returns lag that artificially high discount rate for a sustained period of time the true underfunding becomes increasingly obvious...of course, the ponzi continues right up until the pension faces a solvency crisis at which point a taxpayer funded bailout is ordered...which is exactly what is happening in Kentucky right now.
That said, as the Wall Street Journal points out today, there is another variety of retirement ponzi, this one privately funded via insurance companies, that has been lurking in the shadows since the 1980's that you should also be keeping an eye on: long-term-care (LTC) policies.
Just like their pension ponzi brethren, long-term-care health insurance providers take in premiums today and make a series of actuarial assumptions that justify a promise that they'll be able to satisfy a steady stream of payments at some point in the distant future. Unfortunately, like with pensions, the math all works out beautifully when the insurance companies model 7.5% annual returns on assets, but, in the real world where global bond yields are hovering just above 0%, the math is slightly less rosy.
The business’s dire condition also is a consequence of lower interest rates, especially since 2008. Many insurers assumed annual earnings of about 7% on customer premiums, which are invested until needed to pay claims. The net yield for U.S. life insurers’ overall portfolios is down more than 20% since 2007 and was just 4.6% last year, according to ratings firm A.M. Best Co.
Over the past several years, long term care insurance has posed significant challenges to insurers on a national level. The pricing of these policies for many insurance companies has proved to be insufficient as a result of claims greatly exceeding expectations and low investment returns. Claims have exceeded expectations due to incorrect assumptions concerning the number of policyholders who would drop their coverage and the number of policyholders who would utilize their policy benefits, as well as the cost of providing those benefits. The pricing deficiencies and resulting financial losses have resulted in many long term care insurers seeking large premium rate increases and some leaving the market.
Unfortunately, unlike public pensions, when large insurance companies realize that their math has been off for about 20 years they can't reach their hands out for a taxpayer bailout (at least not in the near term anyway). All of which means that companies like CNA Financial have to pass through massive premium increases to policy holders to avoid insolvency...just ask the Wylie family which saw their premiums surge 90% in just two years.
Steep rate increases that many policyholders never saw coming are confronting them with an awful choice: Come up with the money to pay more—or walk away from their coverage.
“Never in our wildest imagination did we consider that the company would double the premium,” says Sally Wylie, 67, a retired learning specialist who lives on Vinalhaven Island, Maine.
In the past two years, CNA Financial Corp. has increased the annual long-term-care insurance bill for Ms. Wylie and her husband by more than 90% to $4,831. They bought the policies in 2008, which promise future benefits of as much as $268,275 per person. The Wylies are bracing for more increases.
A CNA spokesman says the Chicago insurer understands rate increases “can be challenging,” but “it is important for us to take appropriate actions to ensure we can fulfill our obligations to our policyholders.”
Mimicking our thoughts on public pensions precisely, Genworth CEO Thomas McInerney said the following of LTC insurance plans: "We never should have done it, and the regulators never should have allowed it...That’s crazy."
Long-term-care insurers barreled into the business even though their actuaries didn’t have a long record of data to draw on when setting prices. Looking back now, some executives say marketing policies on a “level premium” basis also left insurers with a disastrously slim margin of error.
Mr. McInerney says future policies should be sold based on the assumption that buyers could face modest rate increases as often as every year.
Of course, last spring we noted the demise of Penn Treaty Network America Insurance and its affiliate, American Network Insurance, the largest health insurance liquidation in history. The decision left solvent insurers, their owners, and customers to pick up the cost for more than 70% of the up to $4.6 billion in projected long-term-care claims expected for 76,000 aging Penn Treaty customers nationwide. Per the PA Insurance Department:
Insurance Commissioner Teresa Miller today announced the Commonwealth Court approval of petitions to liquidate Penn Treaty Network America Insurance Company and American Network Insurance Company, with policyholder claims to be paid through the state guaranty association system, subject to statutory limits and conditions.
"After a long and difficult eight-year legal process, the Court's decision to approve the liquidation recognizes the companies' financial difficulties are too great to be remedied, and that consumers are best protected through the state guaranty association system," Commissioner Miller said.
And while payments from other insurance companies were expected to cover abandoned Penn Treaty policyholders, only so many insurers can fail before taxpayers will be called upon to bail them out.
"Policyholder claims will continue to be covered by the state guaranty association system pursuant to law, and policy claims will be paid subject to the applicable state guaranty association coverage limit and conditions. Policyholders should continue to file claims as they have been in the past, and must continue to pay their premiums in order to be eligible for guaranty association coverage," Commissioner Miller said. "State guaranty associations were created to protect state residents who are policyholders of an insolvent company that has gone out of business. In each state, other insurance companies licensed in that state pay into a guaranty fund, and that money is used to cover claims when a company becomes insolvent and is liquidated."
But don't worry, there's only about $2 trillion worth of LTC claims that will need to be covered at some point in the future...should be fine.