Prudential grows long-term care reserves, draining profits

Life insurer Prudential Financial scrapped an assumption that its policyholders would be less likely to get ill over time, contributing to a $1.2 billion charge to net profits.

The New Jersey-based insurer had previously factored in an expected 1% per year improvement in morbidity over the next 20 years, but removed this from its calculations of liabilities in its long-term care business following its annual review of actuarial assumptions.

The change caused Prudential to adjust the amount it expects to pay out to meet policyholder claims. This contributed to a net income charge of $1.2 billion at the insurer’s divested businesses segment, which contains the long-term care unit alongside other portfolios the firm is winding down. Firm-wide, profits fell to $197 million from $491 million for the year-ago quarter.  

The sum impact of all actuarial updates on Prudential's adjusted operating income was -$160 million, down from the -$622 million reported in the year-ago quarter. 

What is it?

Life insurers size reserves based on their own and the industry’s experience. Actuarial assumptions weighed to set them include mortality, morbidity, retirement and policyholder behavior. Prudential updates these assumptions annually, though will also do so in an interim period if a sudden material change indicates a long-term trend.   

Why it matters

Right-sizing reserves is essential to a life insurer’s solvency. If policyholder claims outpace an insurer’s ability to pay them, it will soon find itself deep in the red. 

The frequent adjustments made to the calculation to ensure this doesn’t happen, however, can cause insurers’ profits to bounce around from one reporting period to the next. It also dampens firms’ enthusiasm for chunky portfolios of long-term business, as slight changes to actuarial assumptions, forecasted over a lengthy time frame, lead to huge swings in reserves.

Prudential exited the individual long-term care business in 2012, following Guardian Life and Metlife. 

Get in touch 

Where does this latest actuarial update place Prudential relative to its peers in terms of the conservativeness of its assumptions? Let us know by emailing [email protected] or tweeting @LouieWoodall or @RiskQuantum.

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Prudential Financial braces for higher lapse risk

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