LTC solvency warning sounded by a few states almost 30 years ago

Aug. 16, 2019 — Some states knew…

 “Three state insurance regulators and two consumer advocates expressed concerns about the future fiscal solvency of LTC insurance companies,” warned a report by the inspector general of the Department of Health and Human Services — in 1991. “They are concerned because the market is new and policyholders may not start filing claims in large numbers for many years. Insurance companies may not be pricing policies appropriately. By the time they recognize insolvency, it may be too late to take corrective action.” 

Contrast that with the dire warnings from the life insurance industry on the hardship LTC policyholders face if their benefits are not fulfilled—or filled beyond what the state guaranty funds can offer in liquidation.

The judge’s decision from the Commonwealth Court of Pennsylvania in the Penn Treaty case “has the potential to profoundly impact the life and long-term care industry … for both insurers and insureds,” the American Council of Life Insurers wrote in a May filing to the Commonwealth Court of Pennsylvania in Penn Treaty, formerly known as Penn Treaty Network American Insurance Co. and American Network Insurance Co. liquidations. The ACLI went on to explain how many policyholders caught short by benefit caps in the state guaranty funds will suffer.

The cautionary note in 1991 is just a small section of a larger report scrutinizing state regulation of LTC insurance.The report, completed during the President George Bush era, largely focused on consumer protections and the need to enforce existing laws rather than creating new ones while noting that minimum standards would allow flexibility and innovation. The HHS report painted the affordability of LTC insurance and what were described as very strict requirements in New York, Massachusetts and Minnesota as drawbacks. 

The report was done at the request of by then-Oregon Congressman Ron Wyden. Wyden was chairman of the House Small Business Subcommittee on Regulation, Business Opportunities and Energy. He is now the senior senator from Oregon.

The 1991 report didn’t identify the states or the consumer advocates who cautioned on future solvency problems, although it named the eight advocacy organizations participating, including AARP, Families USA and Consumers Union and the insurance commissioners’ offices listed are: Kentucky; Maryland; Massachusetts; Minnesota; New York; Texas; Utah and Wisconsin. Massachusetts, Minnesota, New York, and Wisconsin had strong state laws while Kentucky, Maryland, Texas, and Utah had weak laws and regulations on LTC, according to the vintage report. 

The battle over fulfilling policyholder claims in the Penn Treaty companies’ insolvency is being waged between a mega-health insurer coalition and the state liquidator/insurance commissioner, who has support from the life insurance industry. 

In Pennsylvania, the Penn Treaty liquidation benefits battle lurches forward with implications for LTC policyholders nationwide not just in this case but in future liquidations.

Nationwide, market speculators wonder anew what is happening within GE’s LTC insurance block after a whistleblower came forward in mid-August alleging its reserves are far too low for its LTC liabilities.

Meanwhile, LTC giant Genworth Financial’s consolidated risk-based capital ratio for its life insurance companies fell squarely below 200% by the second quarter 2019 from 277% in the year-ago quarter, driven partially by the growth of new LTC claims. Industrywide, equity analysts and industry observers fret about how much morbidity improvement is really factored into the reserves of larger insurers with significant LTC legacy blocks of business. 

The scope of problems that LTC is wreaking for companies and policyholders now stems from old actuarial assumptions that have been oft-repeated in recent years — assumptions that were wrong from top to bottom. Interest rates over time, policyholders’ mortality, policy lapse rates and morbidity/benefits usage were all gravely miscalculated by underwriters in previous decades. Thin premiums idling in an unanticipated low interest rate environment relative to the rich claims benefits the policies are expected to furnish now and in the future is not considered sustainable without rate hikes and cutbacks in benefits along with changes in health and usage.

One industry source does not see any health improvement among those living longer, zeroing out any morbidity improvement companies have factored in. 

On March 1, 2017, the Penn Treaty companies were declared insolvent by the court and placed them into liquidation. The ACLI is supporting the liquidator, in this case the state insurance commissioner, in her bid to extend policyholder claim benefits beyond the varying but sometimes skimpy state guaranty associations’ (GA) statutory limits. 

The case involves whether the insurers’ estate assets cane be used for benefits if they are available, even they exceed the GA coverage limits.

Health insurers, including Aetna Life Insurance Co, Anthem Inc., Cigna Corp., QCC Insurance Co. and United Healthcare Insurance Co., want to eliminate the use of estate assets to pay uncovered benefits. 

The liquidator, Pennsylvania insurance commissioner Jessica Altman, wants to establish a captive insurer that would take some of the assets of the estate of the insolvent insurers and provide benefits to policyholders once they have maxed out on their  GA limits, which are smaller in some states than others, but run around $300,000, with New Jersey having no cap. This captive set up worked in other life insurance and health insurance liquidations such as Executive Life of New York. However, the health insurers say there is “no way to read these statutes allowing a receiver to take assets out of the estate” and give them to a trust to pay claims beyond the  GA limit.

Both life and health insurers are on the hook to pay into the GAs to fund claims. Health insurers say that’s it, but life insurers are concerned about repetitional risk and policyholder welfare. 

Limiting the policyholders to the GA will “almost surely impose a financial hardship upon many people,” the ACLI said in a May 22 court filing. 

If people who purchased LTC insurance from Penn Treaty “are relegated to guaranty association limits, many will suffer irreparable financial hardship,” the ACLI wrote. 

The Pennsylvania-based ACLI lawyer argued that the insurers contributing to the GA funds whose costs would increase due to the reallocation of money could spread the increase over a large population of insureds. This more diluted burden is less than the burden that will be borne on the fragile and vulnerable Penn Treaty policyholder population, he argued.