LTC Bullet: What Do LTCI Carrier
Ratings Really Mean?
Friday, October 19, 2012
Seattle—
LTC Comment: How much credence should
LTCI producers, and especially their prospects and clients, place in
financial ratings? Gold standard or fools’ gold after the ***news.***
*** JOYCE RUDDOCK: IN MEMORIAM. Read
Margie Barrie’s eulogy of Joyce in LifeHealthPRO
here. "Joyce’s connection to LTC was not just insurance but
encompassed her desire, mission and a passion to make the lives of our
aging community more dignified and honored. The fact that she has left us
at such a young age – 58 – is a cruel irony." ***
*** 2013 LTCI TAX LIMITS ANNOUNCED.
Check ‘em out at AALTCI’s website
here or in The Zone
here, including the comparable limits for each year back to 1997. ***
*** WHAT IS THE ZONE? It’s the Center
for Long-Term Care Reform’s members-only website that is packed with
helpful data and information. You’ll find the “LTC Almanac” with its
highlights and links to critical reports and articles on a wide range of
LTC-related topics; key Medicaid and Medicare numbers by year from current
back to the early ‘90s; links to all the major LTC cost surveys for
several years; a transcript of Steve Moses’s “LTC Graduate Seminar”;
dozens of documented reasons why veterans should not rely on the VA for
LTC protection and much more. Want to learn more about The Zone and
what’s on our public website too? Take our Virtual Tour of the website
here. Can’t wait a minute longer to gain access to all this? Contact
Damon at 206-283-7036 or
damon@centerltc.com. He’ll have you in The Zone immediately and
explain our dues payment options and membership levels. Or check out our
“Membership Levels and Benefits Schedule”
here. ***
*** CLIPPINGS SERVICE. Are you still
searching the internet for key articles and reports to maintain your
professional edge? “Let me handle that for you,” says Center president
Steve Moses. Upgrade your Center membership to the “Premier” ($250 per
year) or “Premier Elite” or “Regional Representative” ($500 per year)
level and we’ll add you to the distribution list for the Center’s
“clipping service.” You’ll receive an average of three articles per day
with a pull quote, a link to the whole article, and sometimes a sentence
or two of commentary. You could wait until Monday and read the same
material in your LTC E-Alert, but there’s no substitute for getting
this critical information in real time and you’ll find you’re more likely
to keep up with the information in small daily bites than in one big
weekly chunk. On top of everything, you’ll be helping the Center for
Long-Term Care Reform continue our public policy research and advocacy on
behalf of rational LTC policy and responsible LTC planning. Thanks for
your support. ***
LTC BULLET: WHAT DO LTCI CARRIER
RATINGS REALLY MEAN?
LTC Comment: According to
Wikipedia: “Credit
rating agencies played a very important role at various stages in the
subprime crisis. They have been highly criticized for understating the
risk involved with new, complex securities that fueled the
United States housing bubble, such as
mortgage-backed securities (MBS) and
collateralized debt obligations (CDO).”
If poor work by the
likes of Moody's, S&P, Fitch, A.M. Best and others helped cause the
biggest financial crisis in our lifetimes, what should we make of their
evaluation of long-term care insurance carriers? Could slavishly
following their recommendations cause a personal financial crisis for
families who might fail to insure for LTC but end up needing expensive
care?
I received an email
post from Steve Forman of Long Term Care Associates recently that
addressed these and related questions. It piqued my interest and I
thought LTC Bullets readers would enjoy seeing the piece. It
follows, unedited and including the original graphics. Full disclosure:
LTCA is a corporate member of the Center for Long-Term Care Reform.
-------------------
"Stephen D. Forman, Senior
Vice-President, LTCA, www.ltcassociates.com, A Pioneer and Leader in
Long-Term Care Insurance since 1972, LTCA has distinguished itself as one
of America's Leading Voices on this Specialized Topic."
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YOUR NEXT SALES IDEA FROM LTCA:
"OVERCOMING RATINGS"
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Reading Time: 9 Minutes
In order to overcome a question about
ratings, you must be able to
explain their limitations, then
fill the void with more pertinent
information that a consumer actually
needs.
In my article, "What's
Your Number" I ask the reader to think
deeply about the statistics, acronyms,
professional designations, and other
alpha-numeric shortcuts we use in our
industry to communicate with our clients
credibility, knowledge, and
trustworthiness. Such shortcuts must be
understood by both parties, even if they
don't value them the same: think
of the
widely-discredited Better Business Bureau
ratings which still command inordinate
sway with consumers.
For an insurance carrier, a 170-page
annual report is condensed into a single
letter, which becomes the common currency
of consumers, agents, and the media. Into
this letter grade we pour our trust.
Let's examine whether this is wise or
practical.
WHAT A RATING MEANS
AM Best defines their
rating as "an opinion . . . and not a
warranty". Standard & Poor's
cautions similarly theirs is "an opinion
. . . not a guaranty . . . and not a
recommendation to purchase."
Moody's likewise warns that
their ratings constitute but "an
opinion".
Then there’s infamous Weiss:
“Other rating agencies give top ratings
more generously so that most companies
receive excellent ratings. While this
approach provides great marketing
material for insurance companies and
helps agents and brokers sell more
insurance, it doesn’t help the user . .
. .” In spite of its self-appointed role
as contrarian and consumer-watchdog,
independent analysis confirms Weiss
is not a tougher
grader. Worse, Weiss is
literally immaterial
(deemed irrelevant to investors), a fact
which renders the popular Comdex
Score un-usable for unwisely
including it.
For the majority of producers, decades
of our careers will be spent
representing a bandwith of carriers from
within the "SECURE"
categories. Still,
as many as 77% of companies may fall
into this band¹, a veritable “Circus
of Heaven”. Meanwhile, the rating
agencies are in the peculiar position of
having been ceded extraordinary power
with little risk. To wit: according to a
2012 report, the number of Life & Health
impairments has reached a 50-year
low. In general terms, this means
identifying a high-quality Life & Health
insurer is no more difficult than
hitting the broad side of a barn.
Several years ago, AM Best
Life & Health Division executive Andrew
Edelsberg put things in perspective:
"Only 1 in 500 firms rated A or A- can
be expected to go out of business. Among
those rated A+ or better, only 1 in
1,667 is likely to go bust." Busy
indeed is the reader who will represent
500 carriers in his lifetime—in 2012 he
would be fortunate to represent 20 LTCi
carriers.
But what happens when rating agencies
get it wrong? If AM Best
rates a carrier too highly, and it
goes into Rehabilitation, or
S&P punishes a carrier with a
low rating, and the company performs
quite beautifully? Do consumers,
journalists, or agents hold them
accountable? Of course not. They may
keep a rivalrous scorecard among
themselves, but on Main Street
there are no repercussions.
Meanwhile, in an attempt to re-hydrate
the letter grades into something
meaningful by the use of descriptors,
consider the quality of information we
and our clients have been given to
rely upon. AM Best, 6
gradations of "SECURE"
ranging from:
-
"a superior ability to meet their
ongoing obligations to policholders"
-
"an excellent ability to meet their
ongoing obligations to policyholders"
-
"a good ability to meet their ongoing
obligations to policyholders"
Do the adjectives "superior",
"excellent" and "good"
give your prospects the information
they need prior to making a 30-year
commitment to a company? Knowing they
do not, the agencies have offered
additional qualifiers over time,
including Outlook
(which way the rating is trending over
the next 6 months to 3 years), and
Financial Size Category
(based on policyholder surplus, this
puts companies of similar financial
capacity in the same band).
Outlook is a curious
thing—it’s the closest we have to a
crystal ball. As a consumer, it would
be best to know what the “claims-paying
ability” of our carrier would
be 30-years from now (when we are most
likely to claim), but failing that,
we’ll accept as far a look into the
future as possible. But here’s the
thing about the future: whether
physicist or fortune-teller, no one
can see into it.
After studying 5-years of the
publicly-available press statements of
the leading rating agencies in
relation to one of our leading LTCi
carriers, this author made a bombshell
discovery:
-
In hindsight, a “negative”
outlook will lead to either a “downgrade”,
or a return to a “stable”
outlook. In the present, we cannot
determine which.
-
In hindsight, a “stable”
outlook can turn either “positive”
or “negative”, or
remain “stable”
indefinitely. In the present, we
cannot determine which.
-
In hindsight, a “positive”
outlook will lead to either an “upgrade”,
or a return to a “stable”
outlook. In the present, we cannot
determine which.
-
The different agencies do not
agree with one another over
the number or timing of changes. (For
example, over the course of this 5-yr
period one agency moved its rating of
the carrier just once, even as the
Comdex Score
fluctuated wildly 9 times.)
WHAT A RATING DOESN'T MEAN
The concerns below are more important
than "claims-paying ability"
and are not denoted by the
hyper-abbreviated letter grade.
- EXPERIENCE: How
long has the carrier served this
market? In LTCi, you can purchase
limited actuarial data, but there’s no
substitute for accumulating volumes of
your own exclusive experiential
morbidity and mortality claims data.
How do you compare the B rated carrier
celebrating its 25th
anniversary dedicated exclusively to
LTCi versus the A++ insurer whose LTCi
division is younger than
Pets.com?
- EXISTING CLAIMS:
Who's been there? Who has the
infrastructure, the staff, the
processes, the case managers? Who
turns their claims around in 48-hrs,
who takes 7-days, and who takes 30-45
days? Ratings tell you nothing about
who pays $2,300,000 each and every day
like clockwork with high satisfaction
ratings vs. who has yet to pay their
very first claim.
- SERVICE: As an
agent, you know first-hand what it’s
like to work behind the scenes with
each insurance company. Some are a
breeze, and some make you want to pull
your hair out—it will be the same
for your policyholders. An A+
doesn’t tell us this.
- COMMITMENT: As
you'll see below, simply having money
in the bank doesn't forecast who is
committed to the market, and who might
exit when the seas get rough. This is
a crucial but oft-overlooked point,
since the carrier your client
purchases from today—that A+ rated
superstar—may not even be the one she
files a claim with in 30-yrs. One
possible lens by which to view this is
to ask of the carrier, “Is LTCi a
core product, a
complement to their
other senior portfolio, or a
convenience for their career
sales force?”
- AGENCY: There is
no rating system for choosing
insurance agencies (yet!) but
consumers should invest at least as
much effort into choosing their agency
as their carrier. Does your
agency sell 5 LTCi policies a year, 50
or 500? How strong are their
testimonials and endorsements? How
many claims have they assisted? How
long have they been in business, and
what assurance do you have that they
will remain in business when you need
them?
-
TIMING:
Hinted at earlier, let's dub this the
"snapshot fallacy". It's the
impression in a consumer's mind that
the rating upon which she forms her
opinion is "fixed" at the moment she
looks. It is not. Instead, out of
sight, the rating fluctuates up & down
like a sine wave, while she (blithely
unaware) renews her policy year after
year. What would happen were she to
look again in the future? If the
rating she once knew as an A+ were now
a B++, isn't she already locked-in?
The changes serve only to cause
consternation and anxiety. . . until
they move back upwards, sound
and fury signifying nothing.
BREAKING THE CYCLE
I acknowledge that credit ratings
have their place: they affect the
interest rates carriers
borrow and earn on Wall Street.
But I take issue with the utility of
financial strength ratings as a
product for Main Street.
At the same time, agents
are under intense pressure to
reproduce ratings at the request of
their prospects, who
themselves were compelled to ask after
having read articles by personal
finance columnists, who
themselves rely upon so-called "experts"
and do nothing more than faithfully give
space to their dogma. The cycle repeats
itself like the ancient serpent eating
its own tail.
No one knows how to break the cycle. I
get it.
When your client asks you for the
AM Best rating of a
carrier, how can you respectfully
decline? You don't have to. I've
prepared your answer:
Hand your client this article to
read. I've written this for all of
you.
After all, when analysts base their
upgrades on the pre-condition that
carriers successfully implement rate
increases, it is consumers caught on a
rope bridge burning from both ends.
And what of the stellar ratings your
prospects insist upon? The following A
rated carriers all voluntarily
exited long-term care insurance
within the past 10-years (CNA, A;
Lincoln Benefit, A+;
Great American, A;
Allianz, A; MetLife,
A+; Prudential,
A+; Unum, A-;
American General, A).
There was no question of their financial
security or stability.² The rating
agencies didn’t “get it wrong”.
They were just irrelevant.
From a claims-paying ability perspective,
if we were to ask, "All things being
equal, upon what else would you judge
a carrier?" We have suggested
experience, claims practices,
administrative competence, commitment
to the market, and
agency support as our guides.
Since the vast majority of the
carriers we are all likely to
represent—and our clients to choose
from—are indiscernible from a
claims-paying standpoint, these should
be the criteria we use today.
Stephen D. Forman
Senior Vice-President, LTCA
@ltcassociates
²
The choice by these carriers to
discontinue new sales of LTCi is more
benign than many observers hold. See "The
Golden Age of Long Term Care" for
further analysis.
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1200 112th Ave. NE, Ste. A-101 l Bellevue, WA
98004-3708
Phone: (425) 462-9500 l Fax: (425) 462-9839 l Toll
Free: 1-800-742-9444
www.ltcassociates.com |
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