Way back in the mists of long-term care insurance (LTCI) time, insurers, regulators and consumer groups somehow decided that LTCI issuers had magical world freezing powers.
The people in charge of LTCI decided that, because the idea of a senior living on a fixed income having to pay higher prices for an insurance product was such an insult to our moral values, the price of LTCI coverage ought to be set in neutronium.
A senior's rent could go up. The cost of nursing home care could go up.
Interest rates could go wherever the central bankers, investors and borrowers wanted them to go. LTCI premiums had to stay the same.
They weren't exactly guaranteed, but they weren't supposed to move. The big LTCI issuers and their producers ridiculed Penn Treaty when Penn Treaty had the chutzpah to increase its premiums.
But then it turned out that consumers who bought LTCI could live a lot longer than insurers expected and cling to the policies longer than expected. Interest rates could down and stay down longer than expected.
Lawmakers and regulators are trying to address the problem with new laws and regulations. Massachusetts, for example, is talking about setting regulations that would forbid insurers from using changes in interest rates when proposing changes in premiums for in-force LTCI coverage.
See also: Massachusetts drafts LTCI rate regs
Insurers are trying to deal with the strands of regulatory neutronium by offering skinnier products, to avoid pressure to make promises that might be hard to keep in the face of surprising world conditions.
A modest proposal:
- Require the issuer of any U.S. insurance policy to state, openly and prominently, that "guarantees" are subject to modification by a committee consisting of insurance company executives, regulators and policyholder representatives in the event that certain catastrophic events happen. The idea that insurance companies can readily back up guarantees if the New York Stock exchange shuts down, or even suffers a 90 percent drop in total market value, seems dubious.
- Create an LTCI policy that's more like a very conservative indexed annuity contract: A fixed component, designed to offer a defined amount of long-term care (LTC) benefits under any conditions in which the carrier could expect to operate reasonably normally, and an indexed component, with a value tied to the performance of an index that tracks the performance of the kinds of bonds that insurers would normally use to back LTCI obligations.
If regulators would let insurers offer LTCI products that "bifurcate," or split, the insurance risk from most of the investment risk, insurers could be much more brutally realistic about the minimum LTCI benefits they could promise (under any conditions that don't involve caves and food riots), while offering consumers a chance to get better benefits if interest rates go up to what most insurance portfolio managers think of as normal levels.