Warning of benefit cuts and rate hikes to address a $500-$1 billion shortfall, SHIP files its rehab plan with the Pa. Commonwealth Court

April 23 — Rehabilitators for Senior Health Insurance Company of Pennsylvania filed a three-phase rehabilitation plan April 22 to address an insolvent company with 45,000 policies in force and a funding gap for claims of between $500 million and $1 billion. 

The plan, filed in the Commonwealth Court of Pennsylvania, would require policyholders to reduce or change their current benefits and/or pay higher rates if their policies are not self-sustaining, or don’t have premiums that match their once-promised coverage.

Many policyholders will be required to cut many of the long term care benefits they were once promised or otherwise modify their benefits in there ways — or pay much higher rates.

The LTC policies were underwritten at a time when people weren’t expected to live as long, or live with chronic issues requiring daily professional medical care for such a lengthy period of time and when the cost of medicine was much lower and interest rates for pocketed premiums was much higher. 

The document warned that without the rehabilitation, by the time all of SHIP’s policies finally terminate in 20 to 25 years, it will be short by up to $1 billion in covered benefits for its policyholders.

The purpose of the rehabilitation plan is to reduce or eliminate the shortfall, although the it “is likely that SHIP will be placed in liquidation.

The rehabilitators for the long term care insurer are Pennsylvania Insurance commissioner Jessica Altman, and Patrick Cantilo, special deputy rehabilitator. 

The average age of the LTC policyholder, excluding reinsurance policies, is age is 86 with the average claimant 89 years-old. SHIP’s policies as they stand now, before cuts are made, are rich in benefits, with 69% offering comprehensive coverage covering multiple levels of care, the plan shows. 

Phase One of the plan would first try to reduce or even eliminate the funding gap. It would begin after approval of the rehabilitation plan by the Court.

This first phase would identify the actual policies that are under-priced based on actuarial projections.

Each policyholder whose current premium fell below the actuarial standard now in vogue, called the “If Knew Premium”* would now be required to select one of four options. These options induce a reduction in benefits, the addition of certain policy endorsements, limited benefits under a non-forfeiture option for a reduced paid-up policy, and finally, if the policyholder wants the full contract of benefits, he or she must pay what the plan acknowledges might be a very large increase in premiums. 

Phase Two would look at possibly modifying more policies that could include a permanent reduction in benefits and rate increases ago try to eliminate any remaining funding gap not closed in Phase One would continue. The plan document describes how these cuts and/or changes in future benefits and rate increases might work. Some options chosen in Phase One would not change—the policyholders would be guaranteed their now reduced benefits or new rate increases. 

The tension comes from” two competing considerations” as the plan describes it: the anticipated need for benefits in old age and the expense of the rates to the insurer for getting this coverage. 

“As is true of many similar LTCI blocks in the market, many of SHIP’s policies have historically been substantially underpriced and policyholders have not been asked to pay the premium that would be necessary to assure that those benefits will be available when needed. Obviously, this is not a sustainable model and is a key contributor to SHIP’s present financial challenge,” the plan submitted to the Court stated. 

The rehabilitation plan warns that policyholders who must choose but do nothing in terms of selection an option will face a potential automatic default option.

Phase Three would begin the complete the run-off of the LTC insurance business in force. With any funds leftover, money on hand would go to provide more benefits to policyholders and then to unpaid creditors.

SHIP was placed into rehabilitation on Jan. 29, 2020. It had filed a week earlier.

Last year, SHIP was given a few months to submit a corrective plan to address its then-$467 million deficit but failed to do so, and the unstable situation lingered until state regulators took action earlier this year.

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*The “If Knew Premium” rate is the payment to the insurer which would have been on target or actuarially justified if it was priced at the beginning of the LTC contract. The adequate loss ratio is deemed to be a minumum of 60%. If Knew Premium rates are meant to be forward-based and not factor in previous losses in attempt to recoup them, the rehab document explains.

Covid-19 form & endorsement filings now blooming in states, including rate cuts for slowing retail, restaurant businesses

Commercial property/casualty insurers, much like their auto insurer brethren, are now offering premium rebates and other relief even as some seek to enforce or establish virus exclusions for business interruption, while medical malpractice insurers are cutting premiums for private practice doctors, according to a spate of new Covid-19 state filings. 

At the same time, life insurers are submitting questionnaires to policyholders or applicants on their experience with the virus, filings to state insurance regulators and the Interstate Compact reveal. 

Farmers Insurance, on behalf of several companies, recently submitted a rate and rule filing to give a 20% temporary relief measure for insureds in its restaurant business owners policy and retail/service/office programs due to the novel Coronavirus’s impact.

At the same time, regulars like California Insurance Commissioner Ricardo Lara have begun mandating premium relief for both personal and commercial lines customers.

“With Californians driving fewer miles and many businesses closed due to the COVID-19 emergency, consumers need relief from premiums that no longer reflect their present-day risk of accident or loss,” Lara stated in a release April 13.  “Today’s mandatory action will put money back in people’s pockets when they need it most.”

The Farmers’ measure, filed April 10 by its commercial product director for Farmers Business Insurance, seeks to reduce premiums by 20% for two months for customers in the restaurant and retail/service/office segments. In addition, Farmers and related companies will apply a minimum credit of $20 per month.

There will be no cap on the amount of the premium decrease for larger premium policies, the company said in its filing. These Farmers’ business customers do not need to take any action to make this credit effective although customers on non-monthly pay plans with no remaining balance on their account will receive a refund via check.

“Farmers believes that because of the various stay-at-home orders around the country, the risk for accidents and property damage at these insured locations has been reduced,” it stated in filings with insurance regulators. “The 20% was selected using actuarial judgment while observing the effects of shelter-in-place on local businesses.”

On the medical practice front, Positive Physicians Insurance Co. of Berwyn, Penn., filed a part-time status endorsement for approval to state regulators to address the “many grievance requests from our insureds who are being negatively affected by the COVID-19 crisis,” it is receiving.

Doctors have asked their insurer to reclassify their practice as part-time, with accompanying premium decreases, or who are shuttering their medical offices temporarily or permanently, Positive Physicians said. 

Others are quick to file the exclusion of loss due to virus or bacteria endorsement in the wake of Covid-19. 

For example, Blackboard Insurance Co. in New Jersey filed for the use of this form for its commercial property policy with state regulators.

This business interruption exclusion is a lynchpin of current and potentially massive coverage disputes in the commercial p/c industry. 

To drive home the point, a group of seven senators sent a letter to President Trump, copying the Treasury Secretary Steven Mnuchin April 10. In it, they warned that if certain proposals that would retroactively changing BI insurance to cover damages due to the virus succeed or are litigated at length, p/c insurers could be hobbled financially to the point where they might not have enough reserves to cover standard claims for damage from wind, fire, hail, and other perils. 

“If the insurance industry were now forced retroactively to cover perils that were never accounted for, commercial insurers could experience significant economic strain and/or insolvencies, given the magnitude of the current cumulative estimated claims,” the seven senators, led by Tim Scott, R-S.C., stated. 

The Palisades Property and Casualty Insurance Co. filed in New Jersey for all business written by the Plymouth Rock companies to extend, Additional Living Expense Coverage to any health care worker required by illness or job requirements caused by COVID-19 to temporarily live somewhere other than their primary home. 

This would apply when these expenses aren’t paid by the insured’s employer or a third party. The extension of coverage begins April 1, 2020, and will remain in effect as long as the current statewide stay-at-home order is in place, according to the Palisades filing. 

The Southern Farm Bureau Life Insurance Co. of Jackson, Miss., filed an application for proposed clients that includes a detailed questionnaire of their Coronavirus/COVID-19 history. It includes a question on whether the applicant has been given medical advice by a member of its profession for any new or unexplained continuous cough, a high temperature or fever, and/or breathing difficulties. 

Likewise, Banner Life Insurance Co. has filed to use an individual life temporary insurance application with Covid-17 questions to answer, including whether the applicant has been given medical advice on the virus.

Emerging, Merging and Overdue: What’s coming, what’s expected and what lingers on the calendar

Update April 2, 2020: Genworth stated in a release late Wednesday that the financing arrangement between China Oceanwide and Hony Capital for $1.8 billion in debt funding to help finance the deal with Genworth was successfully extended to June 30, 2020, as anticipated.

Emerging: Analysts are now looking at the risks of a once-improbable scenario–the potential for some state to make property casualty insurers cover business interruption losses in spite of contract language that excludes viruses.

The p/c industry has already estimated catastrophic costs if this were put in place, with a preliminary estimate from the American Property Casualty Insurance Association of losses of $220-$383 billion per month for just small business (100 employees or fewer) interruption. Compare that with the amount of total surplus to pay off losses for all U.S. home, auto, and business insurers–a small slice of the total–of $800 billion, according to numbers from the APCIA.

Some states, such as New York, New Jersey, Ohio and Massachusetts, have introduced legislation that would require retroactive coverage, which would be only one of the many unprecedented actions arising from the Covid-19 pandemic.

Even if state regulators side with insurers and legislation withers, there remains the potential for juries and judges to side with the businesses who have been hurt and but who have dutifully paid their standard premiums to insurer.

This latter scenario is more likely, according to equity insurance analysts from Evercore ISI. There are already lawsuits pending against insurers from the restaurant, casino and hospitality commercial and Native American tribal concerns.

The Evercore analysts, who talked to industry lawyers, believe that about 70% to 80% of commercial property insurance policies have the virus exclusion, and could serve as a final backstop against claims. They wrote in a research note March 31 that the Hartford Financial Services Group Inc. and Travelers Companies Inc. would be the most exposed to retroactive claims but think that The Hartford has already seen its stock suffer for the risk and urged investors to buy on the weakness. Its stock is down to a little over $35 per share from over $53 a month ago.

However, what remains unknown, they say is the special language and wording in some policies that could trigger legitimate claims, they wrote. Only brokers and their clients may have this information now, although states are starting data calls for insurers to gather more information.

Merging and Overdue:

Genworth Financial stock slid 18.02% from over $4 per share to $3.32 March 31 after it announced that, despite winning re-approval from domiciliary state Virginia, the anticipated merger with China Oceanwide Holdings Group Co., Ltd. could be delayed another three months. The parties had previously extended the merger to the end of March. This is the proposed merger’s’ 14th such waiver of the original deadline since announcing the deal in late October 2016.

Genworth, the nation’s largest long term care insurer, cited”significantly higher volatility and substantially reduced liquidity in the global financial markets due to the coronavirus pandemic, which has negatively impacted financing global acquisitions.”

The company did acknowledge that the merger could be consummated earlier, perhaps at the end of May, and expect that existing financing arrangements will stay in place until the new deadline.

Of note, the new waiver allows China Oceanwide to strike the deal if state regulators “subsequently impose materially adverse conditions on the transaction” along with other termination rights.

With key approvals from most regulators, including an agreement with New York for Genworth to contribute $100 million to its New York-domiciled insurance subsidiary at the close of the deal, the arrangement awaits an all-clear signal from the Delaware Insurance Department after the finalization of China Oceanwide’s financing plan, currency conversion and transfer fo funds with China’s foreign exchange administration.

It is unclear what other specific concerns, if any, individual state insurance regulators could have before then.