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.