Long term care policies issued by private insurance companies often rest of faulty actuarial and investment return assumptions. If you have a long term care policy, you might want to read this. From Tyler Durden at zerohedge.com:
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.
To continue reading: Another Ponzi Exposed As Long-Term Care Insurers Double Premiums To Stave Off Losses