One of the little-discussed consequences of low and negative rates is the impact they have on the viability of insurers, especially long-term care insurers.
Insurers sold policies long ago expecting to invest proceeds in high-grade corporate bonds yielding a respectable 7.5% or more. Thanks to central bank policies, bond yields are in the gutter.
In February, Standard & Poor’s downgraded Genworth’s life-insurance units to junk, citing reduced profitability. Met-Life stopped selling long-term care policies altogether.
Will your insurer even be in business when the time comes for you to collect?
Insurers and Insureds Tormented
The Wall Street Journal reports Low Rates Are Tormenting Insurers and Their Customers.
Life-insurance companies are scouring their policies to identify ways to raise rates and fees and lower the amount of interest they have to pay on savings products as low interest rates cut into their profits.
The bottom line for policyholders is they have to pay up or relinquish benefits.
The main culprit: the Federal Reserve’s seven-year-old campaign to boost the economy.
“We’ve been conducting a prolonged experiment in monetary stimulus, and the impact on savers is one of the great unintended consequences,” said MetLife Inc. Chief Executive Steven Kandarian.
Life insurers’ stock prices have suffered. Shares of 10 of the most prominent U.S. life insurers have lost 12% since 2008, wiping out nearly $30 billion in market value in a period when the broader market gained 40%, according to FactSet.
Long-term-care insurance is one of the products hardest hit by low interest rates, because insurers bank on investing customers’ premiums for 20-plus years before claims come due. Eight million Americans own the policies, and many face annual bills that are 50% higher than before the financial crisis, according to regulatory filings and interviews with financial advisers.
Many owners of “universal-life” insurance, a complicated type of coverage combining a tax-advantaged savings account with a death benefit, face unexpected bills of tens of thousands of dollars. That is because insurers credited less interest to the policies’ savings accounts as interest rates fell. Many buyers intended to use built-up interest to help pay the policies’ annual insurance charges as they got older.
Often in their 80s, these policyholders are struggling “to maintain their coverage just as they’re ready to utilize it,” said Henry Montag, a principal with TOLI Center East in Huntington Station, N.Y., which advises trusts on insurance issues. They are “in such an awkward powerless position where there are no good outcomes.”
At Genworth, long a leader in sales of long-term-care policies, shares are down nearly 90% since before the crisis.
Genworth tallies its losses on long-term-care policies, many dating to the 1970s, at more than $2 billion. “We’re trying to get these large premium increases…to get these policies just back to a break-even going forward,” said Thomas McInerney, the company’s CEO. “We’re never going to recover what we’ve lost.”
Will Your Long-Term Care Insurer Outlast You?
The article highlights the plight of 84-year-old Blossom Blumberg who has been paying log-term care premiums to Genworth for close to 30 years.
Last Autumn, Blumberg received a notice that the premium on her assisted-living policy premium would rise by 60% to more than $6,000 a year.
“Nobody ever explained that the premium was dependent on how much money they made from interest rates,” Ms. Blumberg said.
Genworth Financial Inc (GNW)
On March 11, Genworth Agreed to Pay $219 Million to Settle Securities Suit
Plaintiffs alleged investors were misled about profitability of core business. The proposed settlement, which doesn’t admit wrongdoing, is subject to court approval. A jury trial had been set to begin in May, according to court documents.
Rates are way up, benefits down.
Hello Blossom, care to give Ben Bernanke and Janet Yellen a piece of your mind?
Those a bit younger than Blossom Blumberg need to wonder whether their insurer will last long enough for them to ever collect a dime from their policy.
Mike “Mish” Shedlock
Are you expecting us to sympathize with insurers? Sorry. Nope. All my sympathies are with the Ms. Blumbergs of this world right now.
So are mine.
And if insurers go broke – a possible consequence of central bank stupidity – guess who loses
Mish
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Thank you I have said this for a couple years now.
Currently ( in my area ) monthly expense for a moderate senior care facility
$ 12,000 – $ 15,000 a month, was $ 8,000 a month a few years ago.
Good news, they want to raise the minimum wage from $ 10.00 to $ 15.00 an hour.
Better make that $ 20,000 a month.
.
You see a higher minimum wage is better for everyone.
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Mish,
How much real control do central banks have anyway?
It seems to me that in a world where people are living longer and we have less young people than we did a generation ago, then interest rates will naturally be much lower. This is because the stock of young people willing and able to take out mortgages has fallen.
I think of a mortgage as people with capital giving a loan now in exchange for someone’s future income. If there are less young people who have that 25/30 years of future labour to trade, and lots more older people who have capital to supply the money for the mortgage, then interest rates will fall. Simple supply and demand.
All Central banks do is pretend they are in control but they are not. It is a bit like a captain of a ship saying that they control the motions of the ocean. That is why I dont blame central banks for low interest rates.
A better question is why to central banks pretend that they are in control?
A better move than long term care is to choose to combine assets with your parents, have a large multigenerational family (which means you have 4+ children), and use your combined interest property to generate income, while ensuring that the assets are transferred down.
Gone are the days of the easy retirement. Success now will return to the traditional means: the family. that means living close, working close, and a mindset that is not “me me me”.
Individualism is good, but when you’re old and dying alone it tends to suck. Expect a huge swath of childless single women surging through, and with it the asset transfer legislation like nationalized retirement plans, lower death tax exemptions, etc.
You know it’s coming. The State has never shrunk, and it’s not going to start until it collapses from overreach.
Insurance is the DNA of business, we need to keep them healthy or else all commerce stops.
I am glad to say I have never given a thought to long term disability. I doubt if the PTB give a hoot about it either.
By a bit younger, do you mean a year? Short of a ponzi scheme they have no product to sell with which putting money away in to a bank can’t compete.
Well, actually I won’t lose on this round: I already lost long ago. But I judged long ago tha. the value of insurance was negligible. Even the value of deferred-grati”ication benefits was of negative worth.
Part of this was a theorem I developed, that financial services start as a good deal, and — all other things being equal — progress towards scam. My reasoning for the way this works is that if your job is to take money from pot A, put a portion in your pocket, and put the rest into pot B, the feedback of how well you’re doing your job is “how much is in my pocket?”
Thus, the amount that goes into the pocket ever rises.
I saw my father-in-law pay for term life insurance his whole career. When he got cancer he was fired; he couldn’t make the payments, and so collected nothing when he died.
So anyhow, I wnn’t have lost anything on life insurance. I never bought it.
That said, at the rates expenses have risen, and wages have fallen, I’ve already lost long ago.
Increase premiums……problem solved????
Mish…..
Our (my wife’s and mine) premiums went up 20% last year for our LT Care policies with CNA that were purchased in 2000 with no increases until last year. Who knows what comes next??
Gary K
Scottsdale AZ
My housemate was a temp at an insurance company a 18 months ago. He told me about the increase of whole life insurance policy cash-ins. These policies had a lot of zero’s in it.
Our John Hancock LTC took a 95% price increase two years ago. We have had the policies only about ten years. If that continues the premiums will be unaffordable. I’m only 60 years old.
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A diagnosis of a terminal disease can sure make all those years of paying premiums on a LTC policy seem to be a waste of money. In that case the insurance company wins.
Nobody should imagine that this will not affect them. Insurance companies largely make their returns from the investment proceeds of the reserves of premia that they hold. As these reduce – as they assuredly will in Europe – the premia will need to increase or the companies will need to be ‘tougher’ in turning away poor risks or in making payments.
Mish. Great daily. Is there anything one can do? How can we find out about how long we are covered before they do broke. Anyway to have some money returned and opt out? “A bit younger, do you mean a year” abovr. Answer, please.
Don’t know
It will vary insurer by insurer and also by state approvals of premium hikes.
The more they hike the more likely insurers hang on.
Either way customers are screwed
health Insurance and life Insurance are poor Investments
better to save and invest yourself, take the money and buy a small rental. Rich Dad poor dad
Disagree.
Ask any widow who’s late husband was underinsured!
Everybody has a terminal disease.
Can the FED not see what they’re doing to retirees? Mom and dad are dipping into their principal and living longer. What’s going to happen when their savings are gone and they need to go into long term care? My sister and I aren’t going to be able to pay for their care and the kids’ college (and subsequent move back home) and our own retirement (which is looming on the horizon but getting closer at an alarming rate).
My boss turned 60 last year. On his birthday I half-jokingly called him short-time, since he can get Social Security in 3 years. He quickly put a stop to that conversation with “Unless interest rates come up, I’m not going anywhere.” That means I’m not going anywhere either, and neither is anyone below me. And they wonder why millennials can’t get jobs…
“Can the FED not see what they’re doing to retirees?”
Yes they can. But as Paul Volker said to a group of congressmen representing suffering farming districts during the 1981-82 recession, “they’re not my constituents”.
Not one banker has been prosecuted for banking crimes related to the housing bubble. Congress passed TARP. The FED has run ZIRP. Bankers were allowed to lie about the value of assets. Rules for depositors have been changed, subjecting depositors to bail-ins, to recapitalize banks in the upcoming financial crisis. Congress put the tax payers on the hook for derivative losses by Big Banks.
Those all benefit the bankers, the FED’s constituents. Jamie Dimon is a billionaire.
When GOLD is used as money (the only real money), this could not happen. This is why the Constitution says only gold/silver can be money.
SO, then, how did we get into this mess?
We got into this mess by collectively living beyond our means. It is the same old story repeated over and over again. It goes back to ancient times. Gold was used as money back then, but debt still existed and Shimetah (the business cycle) occured every 7 years and the Year of Jubilee (the Kondratieff inflation/deflation long term debt cycle) did as well. A gold standard has never prevented financial cycles.
A gold standard is a peg. The problem with pegs is that at some point they become a detriment in some form or fashion, because they prevent moving beyond the restraint of the peg. An inflection point, such as a war, breaks the peg. Likely, the Vietnam War and Great Society is what broke the peg in 1971.
Every gold peg has been broken. Gold does not prevent cycles from occurring, human nature being what it is.
“This is why the Constitution says only gold/silver can be money.”
This is not true. What the constitution says is:
That Congress has the power to:
“To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;”
And the treasury does coin money, using many different metals. However it doesn’t say anything about requiring gold.
On the other hand it says this about states:
” No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.”
So it appears that states can legally make gold and silver coins legal tender for payment of debts, but cannot create said coins themselves.
Note that it is explicitly stated that states cannot “emit bills of credit”, however no such statement exists for the federal government.
“Nobody ever explained that the premium was dependent on how much money they made from interest rates,” Ms. Blumberg said.”
Yellen said that savers wear many hats. Well, this is one of them. It is turning out that all the hats that savers wear, are made out of paper and are crumpling.
“Plaintiffs alleged investors were misled about profitability of core business.”
FASB allowed the bankers to lie about the value of assets.
We live in a world of illusion. The standard of living has been presented as going in only one direction, up. Go to college, get a good paying job, buy a house, save a lot of money for retirement, retire with plenty of money to get through those years, leaving an inheritance for the kids.
That is not reality and never has been. We have all been misled.
A bank depositor isn’t a depositor. A bank depositor is a creditor. An unsecured creditor. Oh, but there is FDIC insurance. But that works if there are 10 or 20 banks that go under. What if 1,000 go under at the same time?
We were told the crash of 1929 can’t happen again. We were told the Great Depression can’t happen again. It was a one time event. Those are illusions that work, until they happen again. Glass Steagall existed forever, after 1932- until it didn’t. Nothing is permanent.
There is a local financial radio show that I’ve listened to. The gist is that of promoting a financial retirement vehicle in which the buyers are GUARANTEED to have income for life. In the later part of the program they mention a little disclaimer: the guarantee is dependent on the viability of the insurance company that is providing the product the show is promoting. In other words, there is no guarantee.
We have all been sold an illusion, across the board. Pensions, 401K’s, stock market, bonds, jobs, government, you name it.
Mish you are looking at only one aspect of the problem. Many pension plans have lump sum features. Two negative things happen: 1) the amount of the lump sum is increased by law thereby stripping the plan of investable assets and creating larger than average lump sum amounts compared to past years when interest rates were higher and 2) in a low interest rate environment plans cannot meet the assumed plan return on assets. This could put many Fortune 500 companies with defined benefit plans (even if the plans were frozen or discontinued) in deep trouble with underfunded pension plans. By law the underfunding must be remedied over time which is a hit to earnings. .