The Foreign Service Journal, October 2016

THE FOREIGN SERVICE JOURNAL | OCTOBER 2016 57 Turbulence in Long-Term Care Insurance Insurance against the inca- pacities of advanced age is a brilliant idea. Financial advisers agree it should be part of every family’s financial plan. The problem is that even after more than 30 years, providers of the product have not been able to price it properly. Initially, companies in the business made actuarial assumptions that did not survive the test of reality. They were wrong about client experience (people smart enough to buy long- term care insurance were smart enough to maintain their coverage), about life expectancy (more people are living longer into the incapacity stage) and about the value of reserves, which has suffered unpredictable and dramatic reductions in recent years. Thirty years ago, no one, repeat no one, could have, or did, predict that interest rates would go to near zero and remain there for at least a decade. The insurance business model is based on collecting premiums, aggregating these funds in reserves and then obtain- ing a 4- to 5-percent safe return on U.S. bonds to build reserves to pay future claims. A decade of the Federal Reserve’s low-rate policy has smashed this business plan. The result is serious under-pricing of long-term care (LTC) policies. Many companies—including the likes of GE and American Express—have entered and left the business. Few com- panies continue to offer this product, and some of them are in a weakened financial condition. The problems are industry-wide. Now comes the John Hancock Life & Health Insur- ance Co., the only insurer willing to bid on the Office of Personnel Management’s LTC program, with a recently negotiated contract with OPM that continues the federal LTC program, but with huge price increases— in some cases more than double. Federal employee policyholders and their unions are outraged and demanding action. Here are the realities with which these demands will have to contend. First, virtually all LTC policies have seen their premiums double in recent years. It is not only federal employees who are affected. It is always problematic for public sector unions to “demand” benefits not available to other citizens. Second, the federal gov- ernment can neither order John Hancock to offer these policies at a loss nor, indeed, to remain in the business. There is no “high govern- ment official”—or congres- sional committee, for that matter—that can direct a solution. Any changes will have to be negotiated. Third, there is a worst- case scenario, and that is that John Hancock simply withdraws from the busi- ness rather than renegotiat- ing the deal with OPM. In that case, barring a congres- sional bailout (for which I see no appetite on the Hill), federal employees would be faced with entering the open market at their current ages. That would probably involve even higher outlays than John Hancock proposes. Well then, what is the solution, however imper- fect? First, maintain the pressure on OPM and John Hancock. Who knows whether OPM actuaries got the best deal available or whether John Hancock has some room for compro- mise? Second, LTC policies have many variables (e.g., cost, length of coverage, details of coverage, inflation adjustments and other bells and whistles). Moreover, every individual family’s needs are different. These variables offer real scope for policyholders to take a hard look at costs and benefits as applied individually. I understand that John Hancock and OPM have offered individual counsel- ing. As this is written, AFSA is negotiating for such counselors to come to our headquarters to assist our retired members who hold these policies. Individual adjustments may well be possible. Third, affected AFSA members should check the open markets in their states. State insurance regulators can make a positive dif- ference. I am a Virginian, and my LTC premium has doubled. However, my LTC pro- vider, Genworth Financial, raised my rates sharply in 2014. Under guidance from the Virginia Bureau of Insurance, the increase was phased in over three years, with no additional increases until at least 2018. In other words, the market in your state may be more user- friendly than the federal program. It has become axiomatic that we are entering a new economic era. Turbulence, the duration and details of which we cannot know, will be the norm. Gaining knowl- edge of these changes and patience and creativity in dealing with them will be criti- cal. The LTC situation is both example and harbinger. n RETIREE VP VOICE | BY TOM BOYATT AFSA NEWS Views and opinions expressed in this column are solely those of the AFSA Retiree VP. Contact: boyatt@afsa.org | (202) 338-4045