Response To Conseco Situation

I received a request for commentary on the Conseco Trust situation by Mark Miller who authors an excellent Website and blog: Retirement Revised.

Here is the response from the American Association for Long-Term Care Insurance:

When it comes to Conseco and the issue of long-term care insurance, it is very important for people considering buying protection to understand that the past does not equal the present nor the future. Conditions and state regulations mandated and approved in most states are designed to prevent just this type of situation. It is also important for consumers to know that insurers fund state guarantee funds. These guaranty funds guaranty policyholders in the case of an insurer insolvency. The limits range from $100,000 to as much as $500,000 in some states.But, let's look back. The Conseco situation was very unfortunate but other than lawyers attempting to create much ado by crying foul, the resulting agreement provides what many reasonable experts deemed the best of a lousy situation.

Why have insurers who issued policies in the late 1980s and 1990 found themselves facing unanticipated financial strains. One of the primary reasons has been declining interest rates. Insurers collect small amounts of premiums each year, invest the money in anticipation of paying future claims. When many of these policies were priced, interest rates were say 8-9 percent. As we've all seen, they've declined steadily to the point where last week the U.S. government sold treasuries at zero percent interest.

Falling interest rates are wonderfully advantageous to those financing a home or car purchase. The exact opposite is true for long-term care insurers. For every one percent drop in interest rates, an insurer would need a 10 percent premium increase (back to the issue date) to maintain targeted profitability.

Some of the larger, better capitalized insurers raised premiums on policies (these increases ranged from 8 to 18 percent). Others found themselves in a worse situation.

Bad news makes headlines and lawyers create profit for themselves by scaring people. Let's balance that with some positive news; in 2007 long-term care insurers paid $3.5 billion to 180,000 Americans who purchased this valuable protection and got exactly what they needed.