G.E. and LTCI

Thursday, August 15th was a remarkable day for LTCI watchers. It laid bare some of the core issues & concerns for any LTCI PH. This 170 page document authored by whistleblower Harry Markopolos (“HM”) as it relates to GE as an LTCI reinsurer raises some key questions. I will be watching developments in this case. The comments below represent a “starter” in this new development.

What is a reinsurer? “A reinsurer is a company that provides financial protection to insurance companies. Reinsurers handle risks that are too large for insurance companies to handle on their own and make it possible for insurers to obtain more business (that is, underwrite more policies) than they would otherwise be able to. Reinsurers also make it possible for primary insurers to keep less capital on hand to cover potential losses”. More complete definition from source Investopia.

Markopolos, a forensic accountant, maintains how GE might have cooked its books related to its LTCI reinsurance business. I offer no opinion on that & it will be up to “HM” to defend those allegations. But what are some highlights & key questions from this lengthy document that relates to LTCI in general and PHs specifically?

“HM” claims a unit of G.E. known as “ERAC” took on some of the worst LTCI contracts as measured by loss-ratios of the industry. He uses top-8 LTCI insurers as a basis for his comparisons & analyses. This could mean that LTCI liabilities often the concern of regulators may not with the primary insurer but with G.E., a question that should be posed to the insurance regulator ruling on a carrier’s rate increase request that affects you.

The basic principle to keep in mind is that your insurer may hold some percentage of the LTCI liability but the remainder may be held by one or more reinsurers, such as GE or others (e.g. LifeCare). As a PH, do you have a right-to-know where your Policy Form’s liability is parked as a potential solvency matter — i.e. how much is with a reinsurer versus your carrier? Note that “LifeCare’s Reinsurance Failure Will Ultimately Cost GE $2.2 Billion” according to “HM”, so if his thesis is correct what would GE’s failure as a reinsurer cost primary insurers? I wonder how primary insurers reacted to the news on Thursday, especially those carriers that HM claims have an extraordinary sweet-heart agreement(s)?

One point to note with reinsurance “off-market” contracts it that they are private. I will use one example where privacy obfuscates which party faces certain risks moving forward. It is quite possible for these contracts to include risk hedges, such as a hedge against interest rate moves. If, for example, interest rates move in a direction toward zero, as seems to be the current thought, is G.E. in much worse shape than what even “HM’s” analysis suggests? Or, is there an interest rate hedge contained in contract(s) that protects G.E. at the expense of the primary carrier? It would be interesting to find that out (how exactly?). A perpetual low-rate interest environment is not exactly the LTCI industry’s friend. Nor yours apparently.

To serve your best interests, should you be querying your primary insurer to find out their liabilities, reserve status, degree to which your carrier is reinsured with the likes of GE or LifeCare, the nature of those reinsurance contracts, how this factors in rate filings adjudicated by your regulatory body? If you were to do this, you would be performing the same function as “HM” did for GE except your questions would be at the carrier level. If so inclined, good luck with this.

“HM’s” research was aimed only at G.E., not the LTCI industry in general. However, his methodology is a teaching moment for those who monitor the LTCI industry. As you note above, many questions need to be addressed even if “HM’s” thesis is wrong. He opened a Pandora’s box but maybe not the one he expected.

Other interesting data & points came out of the review of the 170 pages. One piece of data that stood out was Prudential’s $113K average reserve per PH. If this number were to represent all PHs across all carriers, for 7.2 million PHs, the total reserve requirement would be about $800 billion. What percentage do you think is actually being reserved? For that, find Waldo in the 170 pp document and respond below.

The other obvious point in reading the document — this is an industry in turmoil & has been for some time. Some other day for additional salient points, especially those that underlie all the pricing volatility that you have been experiencing.

Author: Samuel Cuscovitch

Research scientist / strategist.

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