Wall Street takes on long-term care payouts as insurers balk at costs

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ngd-What could go wrong???

Some U.S. insurers are turning to Wall Street’s financial wizards for relief from the liabilities of their long-term care (LTC) policies, posing a challenge for regulators worried about how new industry players will tackle the risks involved.

These policies help support the provision of care to those unable to handle everyday tasks, such as bathing and cooking, by funding assisted living or nursing home arrangements. Many have become financially toxic for insurers, because of soaring healthcare costs and rising lifespans.

A few investment firms are willing to take on these LTC contracts, betting they can invest the premiums from the policies to generate strong enough returns to cover the payouts, and even turn a tidy profit.

While these transactions promise financial relief to insurers, they are not without risk. The LTC liabilities can be big enough to weigh on even conglomerates such as General Electric Co. If the premiums from the assumed LTC contracts are invested poorly, there may be insufficient money to cover the payouts, industry experts say.

“Some of those deals include nontraditional actors, which we question with regard to their expertise associated with the management of these liabilities, as well as the very aggressive reserving and cash-flow assumptions,” said Anthony Beato, a director at credit ratings agency Fitch Ratings.

Those at the forefront of state insurance regulation paint a picture of the industry’s watchdogs attempting to walk a fine line between the need to alleviate financial pressure on insurers and policing risky deals.

“There is a trend toward encouragement to make sure there is a functioning private LTC insurance market to cope with the baby boomers’ needs,” Fred Andersen, chief life actuary at Minnesota’s Department of Commerce, said of the general regulatory attitude toward these deals.

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