State insurance regulators challenge SHIP rehab plan, wonder if policyholders will get a fair shake

April 10, 2021 — Parties to the rehabilitation of Senior Health Insurance Co. of Pennsylvania, or SHIP, are disputing the best way to treat insolvent long-term-care insurer’s policyholders when billions of dollars and end-of-life care coverage are at stake. 

Rehabilitators and at least a dozen state insurance commissioners intervening, suing or supporting the interveners in the case have stepped up their rhetoric and involvement on how SHIP should proceed. They did so in pre-hearing memos filed April 5th with the Commonwealth Court of Pennsylvania.

While those tasked with attempting rehabilitate the insurer want to avoid liquidation, some state regulators definitely don’t believe that their policyholders will be better off with the amended rehabilitation plan. 

These state insurance regulators dove right into the math of the finances while the rehabilitators focused on choice and quality rather than the ultimate purse holdings. 

The rehabilitation plan “would require policyholders to absorb more than $800 million more than a liquidation. The Plan balances the SHIP deficit on the backs of the policyholders rather than bringing in additional funds through the guaranty associations,” argued commissioners from the intervening states of Massachusetts, Maine and Washington State, the latter of which hosts the longest-serving insurance commissioner in history, Mike Kreidler.

These regulators were joined with new letters of support from commissioners from Connecticut, Louisiana, Maryland, Mississippi, New Jersey, South Carolina, Vermont and Wisconsin.

 “The only evident purpose of the Plan is to avoid triggering the guaranty associations, when they were created to protect policyholders in the event of an insolvency such as this,” the intervening insurance regulators stated. 

When state guaranty associations are triggered in a liquidation, limits for benefits range from about $100,000 to a maximum limit of $615,525 in California, with the vast majority of states (46 states, plus the District of Columbia) having a threshold of $300,000. 

  • SHIP facts as described in court memos: 
  • 41,000 policyholders
  • $2.6 billion (almost) in liabilities 
  • $1.4 billion (almost) in assets
  • $1.224 billion — SHIP funding gap as of June 30,2020
  • 86 — average long-term care policyholder age
  • 89 — average age of SHIP claimant 
  • 47 — Number of states, including Disrict of Columbia, involved should guaranty funds be triggered
  • 1/29/2020 – Commonwealth Court of Pennsylvania enters rehabilitation order 
  • 4/22/2020 Rehabilitators, led by Pennsylvania Insurance Commissioner Jessica Altman, file their plan with Court 
  • 10/21/2020 Rehabilitators file amended plan after considering comments 
  • 05/03/21 Rehabilitators will file an updated proposed rehabilitation plan by this date for Court hearing

Life insurers, health insurance and HMOs pay into the fund to varying degrees depending on state laws. While this is straightforward in amount, the rehab plan seeks to fill the funding gap through a more complex system of increasing premiums and/or reducing benefits, so policyholders will often have to make some difficult decisions in terms of their coverage or how much they can afford to pay to keep their rich policies. 

The rehabilitators said they were anticipating the state regulators’ arguments and said the solution is a lot more complicated than easy math.

In one of the plan’s policy modifications options, policyholders would provide “at least the benefit value that the Guaranty Association would provide in liquidation for every policyholder whose current policy provides benefits in excess of those limits,” according to the rehabilitator’s memo. This means that these policyholders might indeed do better in liquidation if their benefits are less than what the state limit is. 

Other insurance commissioners have sued the rehabilitation plan. South Carolina Insurance Director Ray Farmer, the immediate past president of the National Association of Insurance Commissioners filed Dec. 10, for a declaratory judgment that the proposed plan is invalid and unenforceable to the extent it does not comply with South Carolina’s regulatory authority to set rates and benefits. The matter is pending in federal court.

Jim Donelon, Louisiana’s long-standing insurance commissioner, filed a complaint in U.S. District Court in September 2020 seeking a declaratory judgment that the rehabilitator’s cannot impose rate and benefit modifications on Louisiana policies without complying with Louisiana’s laws and regulations, and also seeking as well a permanent injunction against implementation or enforcement of the proposed plan if it is approved.

 “In the case of a company like SHIP with its unique insurance coverages, a simple arithmetic computation cannot suffice to determine whether policyholders fare better or worse under particular circumstances,” they stated.

“Approximately 85% of SHIP’s policyholders are offered at least one option under the amended plan no less favorable than what they would have in liquidation, and perhaps materially better,” they noted in their memo.

Their memo said it offers policyholder choices, unlike a liquidation would, and allows an array of coverage cuts and premium hikes to suit individual circumstances, which include ailments and longevity expectations. Other considerations that are material but not easily quantified, they argued, include inflation protection percentages offered, lifetime benefits, or just five-year or two-year benefit periods, elimination periods, indemnity versus reimbursement models and benefit triggers.

The rehabilitators offered an example of a policyholder given a six-year benefit period at substantial cost when, due to her heath condition, she reasonably does not expect to live more than one or two more years.

Another example they offered is the ability to have up to 30 months of coverage for no additional premium for some policyholders, an alternative that would not be a available in liquidation, “even if the plan offered in liquidation might have more valuable benefits.”These choices offered are more meaningful and cannot be quantified readily, the rehabilitators argued. 

In addition,“a substantial number of policyholders’ policies and policy rates will be unaffected by the plan,” they said. These policyholders will have at least one option where they will receive at least as much in benefits as would be provided by their respective guaranty associations. Using “simple arithmetic comparison,” it might seem as if about 15% of SHIP’s policyholders wouldn’t do as well under the plan as they would in liquidation, they acknowledged.

The rehabiliators used legal and regulatory precedent to argue that although some individual interests would be more adversely affected or compromised, the plan was designed on the whole to be fair and equitable to policyholders, creditors and the public in general, the constituency of the whole overriding the individual. 

Courts haven’t adopted a formulaic or mathematical test for satisfying the standard that policyholders as a group should fare at least as well under a rehab plan as they would have in liquidation. The courts have not, however, adopted a formulaic or mathematical test for the satisfaction of this standard.

The modification mechanism in the rehab plan uses is designed to “maximize policyholder choice by relying on each individual’s circumstances and chosen preferences—an invaluable benefit to policyholders which would not be available if SHIP were liquidated immediately and the state guaranty associations assumed responsibility for coverage,” the rehabilitators argued. 

However, the rehab plan will allow objecting states to opt-out and offer their own rates for policyholders under a revised rate proposal, according to the memo. 

There are others intervening, including various insurance agents and brokers’ who allege the plan “unlawfully seeks to suspend [their] rights to receive earned commissions,” as well as the National Organization of Life and Health Insurance Guaranty Associations. NOLHGA its expected to offer possible modifications to the plan and discuss the impact on the guaranty associations could be impacted by the plan, both in terms of potential future obligations to policyholders and as claimants against SHIP’s estate.

The entire rehabilitator’s memo with analytics and presentations and lawsuit updates can be found here: 

The entire interveners memo with exhibits can be found here:

Litigation from Donelon and Farmer can be found here: 

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