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Long Term Care Insurance

Greenspan, LTCI, and rates

Whatever you think of Alan Greenspan, he was in the news yesterday. Greenspan reflected on the current worldwide development of negative interest rates. “It will not be long before the spread of negative interest rates reaches the U.S., former Federal Reserve Chairman Alan Greenspan said”.

This is on LTCI-watch as claims-based modeling, an essential tool used by carriers to support a rate increase uses a discount factor (aka investment return; interest rate) that is currently pegged at 4.5%. The figure largely reflects yields of composite long-dated bonds with a mix of maturity dates. As older bonds with higher yields are retired, newer lower yield bonds replace those with an effect of lowering the overall discount factor.

“The 30-year U.S. rate traded at 1.95% midday Wednesday. It reached an all-time low last week.

There are currently more than $16 trillion in negative-yielding debt instruments around the world as central banks try to ease monetary conditions to sustain the global economy”.

Note that in the past LTCI carriers blame low interest environment as a risk to the sustainability of the LTCI product line. You can find this in most industry source documents, such as rate filings, SEC 10-K filings, others. We know that historical, carriers have shed that risk by delivering rate increases to the LTCI consumer.

I took a recent rate filing by a major LTCI insurance carrier and analyzed the effect of a lower long-term yield environment. PHs of this particular carrier have experienced raised rates in 8 out of the last 10 years (2009 – 2019, level premium before 2009) with 1 due next year, despite a consolidated book-of-business dating back to the early 1990s. In the carrier’s recent CT rate increase grant, the loss-ratio was lowered to 1.06 meaning the carrier is still claiming to be losing money from their LTCI business. Hypothetically re-modeling with a lowered 3% and 2% long-duration rate raises the loss-ratio to 1.20 and 1.31 — losing even more money.

In a lower long-term yield environment going forward, who would bear that risk associated with higher loss-ratios? In the past, it has been the LTCI Consumer. Would this change?

The industry might counter with, “well, in a lower or negative yield environment, inflation of costs will be lower”. Do you believe this counter-claim and, if you do, how much lower do you think health (LTC) costs would be (relative to the decline of investment returns)? Further, did the counter-claim argument hold true in the past decade? That era was also characterized as an unusually low yield environment. Refer back to the carrier case above to help answer these questions.