It was a good interview. Debra Newman is "Chair of the Board of Directors for the nonprofit LIFE Foundation" and founder of Newman Long Term Care.
She's knowledgeable and articulate. But she's trying to help the whole industry recover from a horrible credibility gap.
Regrettably I couldn't tell that she read any of the background material I sent (including the earlier group of questions). I don't know if that's an indication of where I stand in the interview pecking order, or a lack of time on her part, or the oversight of the PR agency that set this up. She started out at a pretty basic level, but she ratcheted up when I used vocabulary like "lapse rate" and "actuarial assumptions".
Regardless I was able to ask all of your questions (and yours came up too, CorpBurnout).
The short version is:
1. The industry screwed up their assumptions on the lapse rate. They figured a 5% lapse, or a 95% retention rate per year for 10 years. Reality turned out to be more like 99%/year for a decade. So rather than spreading their returns among 65% of their customers, they were parceled out among 91%.
2. Four years of low bond returns, and more to come. Insurance companies have not been able to generate sufficient return on the invested premiums.
My reading of Berkshire Hathaway annual reports also indicates:
3. Individual company misconduct: underpricing policies to grab market share. ("We lose a little on each policy but...")
She says the good news is that policies sold during the last 4-5 years have been priced appropriately:
- 1% lapse rate
- Assuming people live longer with illnesses
- Reserves are being accounted for more conservatively.
In other words everything should work out fine, and this time we really mean it.
She mentioned that Hancock is already supposed to be setting aside higher reserves due to being owned by Manulife, which has to operate under more conservative Canadian rules. My cynical perspective is that Hancock has still been downgraded, and maybe they're just the last to fall. I don't know which perspective has more merit. "Higher reserves" might explain why MOO is cheaper than Hancock, or it might just mean that MOO has a cheaper claims process.
The best answer she had for failed insurers is that their policy guarantees would be under state supervision, using funds raised by taxing the surviving insurers. This also implies that there won't be much money left over for customer service, which might explain the SHIP trust situation.
For those of you in the Federal Long Term Care Insurance Program, she said that John Hancock pushed through a 25% premium boost on those with v1.0 policies. (She thinks that was for policies sold before 2010. Today's website is selling v2.0.) However v1.0 policy owners were offered an opportunity to reduce their inflation benefit from 5% to ~4.1% in exchange for keeping the same premium. If you're one of those policy owners, I'd appreciate hearing the details from you.
She concluded with a discussion of hybrid policies: annuities sold with life insurance and long-term care insurance benefits. See page 7 of this PDF:
The theory is that:
1. the owner buys a SPIA and accepts a lower annuity rate (which pays for long-term care benefits if necessary) or
2. the owner buys single-premium life insurance which also includes LTC benefits or
3. the owner could redeem the life insurance policy (but not the annuity!) to get their premium back.
This hybrid policy costs more money than the traditional policies (or the hybrid offers less benefits for the same price) but this time the guarantee is supposed to be more credible. I haven't verified this next statement, but the hybrid premiums are supposed to be lower than the cost of buying two separate policies offering the same benefits.
Another option is a joint LTC policy, where a married couple shares the benefits. Each would start out with a $250K limit, but if he needed more then he could dip into hers (leaving her with less). Again the premium of a joint policy is supposed to be lower than two separate policies. This seems great as long as you're the guy who dies on the actuarial schedule. It's not so great if you're the woman who lives to be 110 years old and survives with Alzheimer's for 20 years.
She says that turnaround experts have been brought in to fix Hancock's claims-approval and claims-payment processes. I wish them luck.
I think that LIFE is doing a great marketing job by breaking the situation down into "old bad policies, administered by states if necessary" and "new smart policies, problems solved". It could help restore trust, but I'm not sure how long the effect will last.
We're a skeptical, cynical crowd too... LIFE's marketing approach will probably go down well with the usual clientele.
I'm writing this up (with a few more details and links) for a blog post to go up on Thursday 6 December. Let me know if there's more to write about.