Tag Archives: hybrid insurance

2 Problems Present a Big Opportunity

The continued decline of standalone long-term care policies seems inevitable, and the life insurance gap among Americans continues to widen. Hybrid policies offer a joint solution that with the right approach can turn these two challenges into a new market.

Recent months have seen a steady drip of bad news from life insurers, as firms have had to boost their reserves to the tune of billions in an expectation of soaring payouts for long-term care policies. October’s update from Unum followed Prudential’s in August, and by the time this is published more will likely have followed.

While troubling, the news simply confirms something that has been fairly obvious for some time: The old long-term care market – once so popular as a means of funding assistied living, nursing home and home care services – is now more of a headache than an opportunity.

Insurers are now having to significantly review assumptions made long ago when the first such policies were written, during a period when life expectancies were shorter and health expenses lower. To say the equation has shifted would be an understatement — healthcare costs for assisted living have almost doubled over the last 15 years, while one in two Americans now suffers from chronic illness.

The accompanying increased premiums have decimated the market. Many insurers have withdrawn from the line altogether, and those that remain are having to be increasingly restrictive with their policies.

See also: Insurtech: Mo’ Premiums, Mo’ Losses  

Axing an entire revenue stream, however — especially one that was once so lucrative — is risky in a situation where demand is clearly not the problem. The need for long-term care is going nowhere. And getting on the front foot with a new approach would be advantageous should a new solution cause an emptying marketplace to fill back up.

Hybrid policies are designed to make long-term care insurance profitable again, and they do so by simultaneously offering a new solution to another difficult problem — the decline in the life insurance market. The number of Americans holding life insurance has fallen steadily for years. The number of Americans holding life insurance has been falling steadily for decades and is now at a record low, with about half of U.S. households going without.

Hybrid policies work by combining the two types of coverage – life insurance and long-term care – and allow for payouts based on accelerated or early payments of a death benefit. Importantly, the combination also allows insurers to stabilize the risk profile of the product and provide a sustainable means of growing both the top and bottom line.

Despite some initial skepticism based on previous miscalculations that are now coming home to roost, insurers are starting to warm to the new approach, and upward of 260,000 hybrid policies were sold last year.

As well as potentially re-opening the long-term care market, the policies could simultaneously help insurers reverse the downward trend in life insurance. Evidence suggests that one of the main barriers for uptake of life insurance among today’s customers is the lack of flexibility and control associated with traditional products. By addressing this, hybrid policies promise to turn two problems into a new and untapped market for insurers.

See also: What’s Next for Life Insurance Industry?  

However, the skepticism isn’t without cause. As the headlines are reminding us, the consequences of incorrect assumptions and miscalculation can be drastic and long-lasting. If the long-term care market is to enjoy a hybrid revival and avoid the mistakes of history, carriers will need to ensure that the design is right. Given the nascent stage of the new product, this requires a specific set of underwriting skills, a granular understanding of the pricing and risk modeling involved, a deep expertise in mortality rates and new reinsurance structures to support risk transfer. For those that can get it right, though, the rewards will be significant.

Is This the Worst Policy Ever Issued?

OK, there have been some amazingly stupid contracts written over the years. But among people who really ought to know what they’re doing, one from France probably does take the biscuit. It’s a hybrid life insurance/savings product that allows a policy holder to allocate capital among various funds. Nothing very strange or stupid there. However, here’s the catch:

It allows the policy holder to switch funds this Friday based on the prices of the funds last Friday. And that isn’t just stupid, that’s doolally. It may be the worst policy ever issued.

The basic background is that this was a reasonably popular sort of contract among French insurance companies back in the 1980s and ’90s. Take out a life insurance contract (usually, to get the tax privileges that go with such a contract) and use it as a savings vehicle. You can swap between bond, equity funds and so on as you go along. Given the speed of the post in those days, and the general rarity with which people fiddled with their investments, prices of the funds would be published on a Friday, and you had until the next one to switch around your investments based on those prices.

The world has changed since then: We can all look up asset prices in seconds now. And some of those insurance policy holders noticed. They started aggressively managing (as they have every right to do) the savings in their funds. You can see what’s coming here. If I can trade Thursday on last Friday’s prices, I’m likely to do pretty well, because I know what has happened to prices. And so it is with some of these players.

Does a 70% compound profit per annum sound like a juicy investment return to you? It does to me.

Of course, there has been all sorts of scrambling to try and get out of this. The company managing the contracts, Aviva, has been refusing to move funds, for example. And it should be said that most of the people with these contracts were, umm, gently maneuvered out of them over the years both from this company and others. You know the sort of thing: “Sirs, we want to make a slight change to the T&Cs of your contract; here is €100 for your trouble in signing this and returning it to us.” That change being that you’re no longer allowed to shift on the basis of 20/20 hindsight.

Max Herve-George was not tempted by such offers. So, he’s been making those alarmingly high profits, isn’t budging and has been up and down the courts system (winning pretty much all the while) to hold Aviva to that contract.

It gets better: Herve-George is, under the terms of the contract, allowed to add more funds. He’s made arrangements with a hedge fund or two (who wouldn’t like 70%-per-annum returns?) to inject perhaps a further €20 million…..and you can see where this is going, can’t you? At some point, he owns the company, then France and then the entire planet. FT Alphaville gleefully calculates for us when this is going to happen. Might not be in my lifetime. but it’s likely to be in Max’s.

Of course, this isn’t actually going to happen. As Herb Stein pointed out, if something cannot go on forever, then it won’t. But the interesting question is, well, what is going to stop it?

There are really only two possibilities. One is that France, or the French courts, shred contract law. And, believe me, over things like savings and life insurance, the French are very serious indeed about that law. Or, Max ends up owning Aviva, the company that sold him the contract.

As it happens, an old friend of mine is working as an adviser somewhere in this case. And we’ve been chewing the fat over which way it’s going to turn out. Our best bet is that Max ends up owning Aviva France.

The thinking is along these lines: First, France really does take extremely serious ly the law surrounding these sorts of investment, life insurance and pension policies.

We’re both reminded of the case of Jeanne Calment. France has a system of reverse mortgages. You, a nice little bourgeois lawyer, say, look around you and see some little old lady living in a nice apartment that she owns. Say, a 90-year-old little old la dy with no surviving descendants. So, she’d quite like to swap the apartment after her death for an income stream now. A reverse mortgage of sorts. So you do this, and she goes on to be the longest-living human being ever (OK, for completists, leaving out the Antediluvians). In 1965, at age 90 and with no heirs, Calment signed a deal to sell her apartment to lawyer André-François Raffray, on a contingency contract. Raffray, then aged 47 years, agreed to pay her a monthly sum of 2,500 francs until she died. Raffray ended up paying Calment the equivalent of more than $180,000, which was more than double the apartment’s value. After Raffray’s death from cancer at the age of 77, in 1995, his widow continued the payments until Calment’s death in 1997, at age 122.

French law is really very strict about such things. So, we just don’t think that the courts are going to shred the contract: Yo do so would be shredding that basic sanctity of contract law.

Yes, it’s true, you can’t write a contract making yourself a slave, and there are some other restrictions. But you are indeed allowed to write some amazingly stupid contracts, and you will be held to them.