LTCI Watch: Puerto Rico

Of course, you probably know that, but what I think is really interesting about Puerto Rico is that one of its big problems is defined benefit obligations, as in Detroit and Stockton.

And, because Puerto Rico is the equivalent of a state, not just a city, its problems also involve problems with Medicaid obligations.

In other words: If Puerto Rico defaults, insurers that are using bonds from Puerto Rico to back long-term care insurance (LTCI) policies or other long-term care (LTC) finance vehicles may have more trouble paying LTC-related benefits because Puerto Rico is having trouble with LTC costs.

Maybe that's a sign of things to come. Maybe regional and national governments around the world will default on bonds partly because of problems with meeting LTC obligations.

The defaults could weaken insurers' ability to make good on their claims.

Insurers' difficulties could increase unemployment levels and leave some customers with unexpected gaps in their LTC financing arrangements. That could further increase governmental burdens and governmental defaults.

All because the legislators of the world delegated the job of propping up the economy to central bankers, rather than swallowing hard and setting up big new spending programs, or, conversely, saying, "Keynes, fooey," and making tough decisions to raise taxes and cut benefits promises.

By deciding not to decide, the legislators pushed the central bankers to hollow out the world's nest eggs. Now we will learn whether sucking the yolk out of the nest eggs will lead to little problems, or whether the resulting vicious feedback loops will lead to big problems.