Independent
Thinks s/he gets paid by the post
- Joined
- Oct 28, 2006
- Messages
- 4,629
As I had explained, it's a comparison. In the case of financial difficulties, the insurers may still claim from the reinsurers, whereas most other private companies do not have this additional layer of protection.
You've said a couple things I can agree with. One is that insurers can use mortality pooling to add value to people who want income for exactly as long as they live. Another is that some retirees might benefit from a planning strategy that separates their spending into "needs" and "wants", and then target a very high probability of success for the "needs", while going further out on the risk/return curve when funding the "wants". (That's my re-wording of the strategy that I think you're promoting.) Those comments make sense to me.
But I've disagreed with statements like the quote above.
I've pointed out that typical reinsurance contracts don't make payments because of "financial difficulties". If there is a general recession with a lot of bond defaults, causing stress for insurers who have invested in bonds, reinsurance payments don't suddenly go up. Insurance companies can buy credit insurance just like anybody else, but reinsurance doesn't give them something better.
I'll try an analogy. If a manufacturer has factories in one country but sells a lot in other countries, it will have some currency risk. It might hedge this risk with some sort of currency derivatives. Suppose it wants to issue public bonds and get a bond rating. The rating agency will note that it has this currency risk, then look at the hedging program. The hedging will be recognized as part of the rating.
A bond salesman who says "This company is actually stronger than its rating, because it has a currency hedging program." is misleading the customer. He's implying that the rating agency ignored the hedging program.
I understand that ratings aren't perfect. But any insurance salesman who says "This company is actually stronger than its rating because it has reinsurance programs." is misleading the customer. The salesperson is in no position to claim that the rating agency isn't using the reinsurance in its rating, but that's what he is saying.
On the CPI issue, I made that comment before I realized that you aren't in the US. Here in the US, we not only have CPI-linked bonds, but also CPI-linked annuities (see the Vanguard site). In fact, in the US everyone already has a CPI-linked annuity through Social Security. A financial adviser who thinks a client might be a candidate for a private SPIA should first recommend that the client maximize his/her SS monthly income by deferring the benefit start date. It's plausible that a lot of people who agree with your strategy of having a solid base of "insured income" would conclude that SS meets that need.