Biden to FSOC: Get to Work on Climate Change Financial Risk Now

May 21, 20121 — The Financial Stability Oversight Council got its marching orders Thursday from the Biden Administration –make climate-related financial stability and other financial risks a priority.

The Executive Order is a plan to put this in place throughout the federal government, to be led among the financial regulatory agencies by Treasury Secretary Janet Yellen, chairperson of FSOC. The approach is part of a “whole-of-government approach to Mitigating Climate-Related Financial Risk,” according to the EO.

In a statement, Yellen said she will be prioritizing this work while noting that, back in March, she had kicked off her first FSOC meeting as chair (she had been an FSOC member as Federal Reserve Board chair previously and gave a shout-out to the work the Fed is doing on climate risk) discussing climate change.

Highly-engaged FSOC members have already begun analyzing the issues within their jurisdictions, Yellen said in a statment following the climate-related financial risk EO yesterday.

The next FSOC meeting is scheduled for June 11. Although the preliminary agenda calls for the meeting includes money market mutual fund reform and the transition from LIBOR and money market mutual fund reform, climate change discussions are now a prioerity and will likely get attention.

Yellne promised yesterday that FSOC will work with its members to bolster climate-related financial disclosures and other data dources to improve measuring potential risk and exposure.

Yellen is tasked as FSOC chair under the EO with publishing a report before the end of the year on ecommendations to mitigate finanial stability risks, including in the insurance sector. In the insurance sector, FSOC has a voting independent insurance expert member, Tom Workman, and a nonvoting member, the director of the Federal Insurance Office, Steven Seitz. There are 10 voting members total. Five members who do not have a vote act in a an advisory role.

“This work will be challenging, and we cannot delay this hard work any longer,” Yellen said in her statement.

Yellen intends to increase the scope of the climate change risk assessment and mitigation efforts as part of a global effort, as well.

“I will also work to ensure that Treasury engage fully with our global partners through the G-7, G-20, and Financial Stability Board, helping to promote a strong and consistent global approach. Our pensions, our savings – our future livelihoods – depend on the financial sector to build a more sustainable and resilient economy. We all need to have the best tools and the best data to make well-informed decisions,” the Treasury secretary said.

Sen. Dianne Feinstein, D-Calif., who authored the pending  Addressing Climate Financial Risk Act, to help ability of federal regulators deal with climate change risk within the financial system, responded to the EO by noting that risks are greatly impacting the insurance sector and its customers.

“Reducing our carbon emissions is the best tool to fight climate change. But climate change is already creating a strain on our financial system. For instance, wildfires are driving up property insurance cost, making it less available. Farmers are being forced to contend with more severe droughts. And sea-level rise is undermining homes and critical infrastructure,” Feinstein said in a press release yesterday following the EO,” Feinstein stated in a press release.

Feinstein also wrote a letter to Seitz at FIO last September asking for a report on the effect the scourge of increased wildfires have and will continue to have on private insurance markets and recommendations to make the market more affordable in the face of these increased risks.

A digital review of several most recent FSOC annual reports found that climate change and severe weather like wildfires and rising sea levels were not even mentioned. When fire was discussed it was only in reference to “fire sales,” or the disorderly liquidation of assets to meet margin requirements or other urgent cash needs.

This is happening not a minute too soon said a source previously associated with FSOC. This person noted some California insurers have been at the forefront of trying to assess and mitigate climate change risk from the beginning.

In a March 2021 article for American Progress calling for a more vigorous FSOC, its associate director for economic policy Gregg Gelzinis broke down the threats: “The increase in frequency and severity of wildfires, floods, hurricanes, droughts, and other weather events will decrease the value of physical property, disrupt supply chains, compress corporate profits, drive up insurance claims and reduce the availability of insurance, and generally limit the ability of affected borrowers to repay debt,” he wrote.

“Climate-driven environmental shifts, such as rising sea-levels, will compound these impacts.” Financial institutions could then suffer massive losses, triggering further loss exposure for investors at all levels of the financial system, Gelzinis warned.

However, at the state level, some insurance commissioners have been fully engrossed in climate change issues for multiple years now.

Washington State Insurance Commissioner Mike Kreidler has held summits on the topic and devoted his department’s resources to it. The National Association of Insurance Commissioners will be hosting a panel next week as part of its annual international issues forum on climate risk and resilience. The May 26 discussion will be moderated by Andrew Mais, NAIC secretary-treasurer and Connecticut’s commissioner of insurance, who has been actively engaged on the topic. California’s insurance department has a climate change working group under Commissioner Ricardo Lara.

The NAIC has an executive level climate and resiliency task force and adopted an insurer climate risk disclosure data survey in 2010. However, in response to its latest survey released by the NAIC and its Center for Insurance Policy and Research late last November, researchers found that “few insurers” had reported changing their investment strategy in response to considerations of the impact of climate change on its investment portfolio. The NAIC has a nonvoting member on the FSOC, currently Eric Cioppa, Maine’s insurance superintendent and a recent NAIC president.

The EO also requires the national climate advisor and the director of the National Economic Council to develop, a comprehensive climate-risk strategy to zero in on any and all climate-related financial risk to government programs, assets, and liabilities. This work should be be done in 120 days, it says, and will also identify the public and private financing needed to reach economy wide net-zero emissions by 2050. The work must also advance economic opportunity for workers, especially in disadvantaged communities and communities of color.

‘Over and done with:’ China Oceanwide withdraws Genworth application from Virginia SCC

April 23, 2021 — China Oceanwide Holdings Group Co. Ltd. asked for its application to acquire Genworth Financial Inc. to be withdrawn in a letter to Virginia regulators, formally ending an almost five year attempt to purchase the long-term care insurer.

The acquisition was publicly proposed in October 2016, although Genworth had been courting would-be buyers privately in the months before it made its choice to go with the Beijing-based conglomerate, offering $5.43 per share or $2.7 billion.

In the end, after numerous state federal regulatory approvals and re-approvals were won in the U.S., and even after Genworth sold its majority stake in its mortgage insurance subsidiary in Canada to remove any hurdles there, China Oceanwide could not raise the funds needed to finance the deal, and Genworth elected to terminate the merger April 6.

China Oceanwide’s letter to the Virginia State Corporation Commission through its lawyers was short and curt. It noted that the application had been approved by the SCC’s Bureau of Insurance on Jan. 11, 2019, and re-approved on March 31, 2020.

“We are submitting this letter to inform the Bureau that pursuant to the notice of termination, dated April 6, 2021, provided on behalf of Genworth to China Oceanwide, Genworth has exercised its right to terminate the Merger Agreement and abandon the Proposed Acquisition pursuant to Section 8.2(a) of the Merger Agreement, with such termination effective as of April 6, 2021. In light of the foregoing, China Oceanwide respectfully requests that the Application be withdrawn from the Commission and the Bureau,” the filing on Bland & Sorkin letterhead said.

Thus ends the saga, although Genworth is planning on moving forward with an IPO of its mortgage insurance subsidiary, which it announced earlier this week.

 Although no state regulators have commented despite inquiries and Genworth is in a quiet period before earnings and generally cannot comment, one equity analyst wrote after Genworth terminated the merger that it could face solvency issues in the future without the cash infusion of about $525 million to be given to Genworth’s. life insurance businesses. 

“Our understanding is that GNW has no intention of supporting GLIC with any future capital contributions, which may mean GLIC will be taken over by regulators over the next few years, if LTC pressure continues,” warned Evercore ISI analyst Thomas Gallagher in a research note April 7. The note regarded Ameriprise Financial, Inc., which had reinsured half of its LTC block, about $2.7 billion, Genworth’s subsidiary, Genworth Life Insurance Co. or GLIC.

The analyst was gaming out what would happen in a dire solvency event to Ameriprise’s reinsurance contract with Genworth, as it has reinsured half of its LTC block to GLIC, which it noted had year-end RBC ratio of 229% “and so it is probably okay for now, but worth watching if the RBC dips below 200%, a level at which regulatory oversight and surveillance would increase,” the analyst wrote.

The life businesses must rely on their consolidated statutory capital of about $2.3 billion as of the end of the third quarter 2020, stated Tom McInerney, Genworth’s CEO, on a conference call in February to discuss year-end earnings. He touted though, the fact the company secured, on a cumulative net present value basis about $14.5 billion of approved LTC premium rate increases since 2012. “As we’ve discussed in the past, we have no plans to infuse additional capital into, or extract capital from, our U.S. Life Insurance businesses,” McInerney stated.

Gallagher wrote that Ameriprise’s total potential total economic exposure to LTC is $5.4 billion.

To market, to market: Genworth Financial files intent to IPO mortgage insurance sub after scuttling Oceanwide deal

April 19, 2021 — Genworth Financial is planning on going to market with its mortgage insurance subsidiary, triggering its Plan B in the wake of its collapsed deal with China Oceanwide Holdings Group Co., Ltd. 

In a filing for a proposed offering April 19 with the Securities and Exchange Commission, Genworth Mortgage Holdings Inc. stated that recent data reveals continued optimism in the resilience of the U.S. housing market while more available and attractive risk transfer alternatives have improved the mortgage insurance industry’s risk profile.

Genworth hasn’t yet determined the number of shares to be offered nor the price range for the proposed offering.

In deciding the time was ripe for a future IPO, GMHI also touted what it sees as the strength, durability and diversity of its customer relationships among its 1,800 active customers across the mortgage origination market. These include national banks and other mortgage lenders, such as local and community bankers and credit unions.

An index from the National Association of Realtors measuring homebuyer’s mortgage payment ability using median levels of income and pricing increased to 170 in December 2020, up from 158 in 2017, according to GMHI’s new filing. 

Total capitalization of the mortgage company is listed as about $4.62 billion as of Dec. 31, 2020.

Genworth Financial mentioned it was weighing the possible spin off its mortgage insurance business well over a year ago, before the Covid-19 pandemic struck the globally, while it was still struggling to complete its acquisition by China Oceanwide, mainly through gaining all remaining jurisdictional regulatory approvals. This was before funding the proposed acquisition, first announced in October 2016, became the last, final and probably fatal issue for deal. Genworth Financial called off the merger two weeks ago.

Genworth Financial, the parent, expects to indirectly own at least 80% of the mortgage insurer’s common stock following the deal’s completion. A tax allocation agreement between the parties depends on the parent company’s continuing ownership of at least that much. 

“Our parent’s indebtedness and potential liquidity constraints may negatively affect us,” GMHI warned in the filing. 

GMHI operates under GSE (government sponsored enterprises like Fannie Mae and Freddie Mac) restrictions, which mean that’s liquidity must not fall below 13.5% of its outstanding debt. 

However, if Genworth Financial no longer owns directly or indirectly 50% or more of our common stock, Fannie Mae has agreed to reconsider the GSE restrictions.

Parent company Genworth sold all of its common shares in Genworth Mortgage Insurance Australia Ltd. in March to help fund its ongoing settlement with AXA, leaving a balance owed of $338 million, which is subject to increase, the mortgage insurance company stated in the filing. 

Genworth told the mortgage subsidiary that under the AXA settlement, the holding company plans to repay or reduce upcoming debt maturities with money made from the offering of its 2025 senior notes. 

The significant financial settlement with AXA was announced in July 2020 and involves losses from allegations of misspelling payment protection insurance underwritten by two companies that AXA acquired from Genworth in 2015. The liability case was argued under the High Court in the U.K. Under the terms of the settlement, Genworth had to pay AXA $125 million last July, in addition to a former interim cash payment the year before and deferred cash payments totaling approximately about (converted from pounds sterling) $442 million in two installments in 2022 and to pay a significant portion of all future mis-selling losses incurred by AXA, which the company will invoice each quarter. 

J.P. Morgan and Goldman Sachs & Co. LLC will be the joint book-running managers for the proposed offering.

The company has been buffing the image of its mortgage insurance subsidiary for awhile. North Carolina-based Genworth Mortgage Insurance rolled out a colorful and detailed 29-page investor presentation Aug. 17, 2020, touting the subsidiary company’s strengths, such as leadership, capitalization, risk management and operating performance over the years.

The presentation, led by Dan Sheehan, Genworth CFO and CIO, Genworth Mortgage Insurance CEO Rohit Gupta and CFO Dean Mitchell, served as a primer in the structure of the company as well as a lesson in how Genworth Mortgage is very much a separate entity from that of Genworth, the long-term care insurer, which faces a set of very different challenges.

Photo by Laura James on Pexels.com

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 (42 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 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: https://630dfcef-4112-425b-a05a-db687961d4d5.usrfiles.com/ugd/630dfc_1ea118f30e5d45ebaebabb07c8eb6a2a.pdf 

The entire interveners memo with exhibits can be found here: https://630dfcef-4112-425b-a05a-db687961d4d5.usrfiles.com/ugd/630dfc_d60ea856f56340f68dd781a187ceddd2.pdf

Litigation from Donelon and Farmer can be found here: https://www.shipltc.com/related-proceedings 

LTC New Blotter, April 2021: Curtains and Fresh Starts — Genworth, GE and the Regulators

April 6, 2021 —

1 . The prolonged merger agreement between China Oceanwide and Genworth Financial is finally over, after Genworth pulled the plug after the market closed April 6. Oceanwide was not able to show Genworth the money, and wants to have the freedom to move forward with a likely partial IPO of its U.S. mortgage insurance business. No time frame was given for such an offering.

Stateside, this could mean Genworth’s long-term care insurance business could deteriorate faster, analysts warned. “Our understanding is that GNW has no intention of supporting GLIC [Genworth Life Insurance Co.] with any future capital contributions, which may mean GLIC will be taken over by regulators over the next few years, if LTC pressure continues,” said Evercore ISI equity analyst Thomas Gallagher in a research note April 7. What happens to Genworth’s enormous legacy LTC block will be of regulatory interest without the anticipated cash infusion from China Oceanwide. Gallagher’s research note focused on the news’ effect on covered company Ameriprise Financial, which has reinsured half of its LTC block to Genworth’s life insurance subsidiarity, which is probably okay for now with a 229% RBC ratio at year-end, he said. A 200% RBC is the threshold for regulatory involvement, generally. The company also has over $1 billion in debt coming due later this year.

The curtain-call on the $5.43 per share deal came as no surprise but it did come more than three months after the 17th and final extensions of the merger agreement, on Dec. 31, 2020. Genworth’s board of directors “has concluded that Oceanwide will be unable to close the proposed transaction within a reasonable time frame and that greater clarity about Genworth’s future is needed now in order for the company to execute its plans to maximize shareholder value. Thus, the board decided to terminate the Oceanwide merger agreement,” stated James Riepe, Genworth’s board chairman in a press release. The LTC insurer left the possibility of working together on the table. “Genworth continues to share Chairman Lu‘s vision of bringing long-term care solutions to the aging population in China.

Both parties believe there are significant, compelling opportunities to address critical societal needs outside of the U.S,” stated said Genworth president and CEO, Tom McInerney. Genworth, over the course of about four and a-half years jumped through scores of hoops to try to close the deal, from getting regulatory approvals in key states, promising to contribute $100 million to New York-domiciled insurance company, Genworth Life Insurance Co. of New York, selling its interest in its Canadian mortgage insurance unit after failing to get a timely regulatory approval there and even having some LTC employees begin to learn Mandarin.

The Richmond, Va.-based company is focused in its revised strategic plan so it has been settling debt and legal matters in the last year or so, including the sale of Genworth’s interest in its Australian mortgage insurance business, its $750 million debt offering at the U.S. mortgage insurance holding company and the negotiation of a settlement with AXA S.A.

On the plus side for the business, Genworth has been steadily getting needed rate increase requests from states and won a recent lawsuit in New Hampshire where its life company challenged amended regulations promulgated by the state’s insurance department retroactively limiting rate increases for LTC insurance policies for over 6,000 New Hampshire residents, according to the opinion summary. Genworth argued against this under the takings clause of the state and federal constitution. The New Hampshire Supreme Court concluded that the regulations invalid and reversed a lower court opinion. The state Supreme Court ruled in February “that New Hampshire’s regulation that places certain caps on long-term care insurance premium rate increases exceeds the Insurance Commissioner’s rulemaking authority and, therefore, is invalid,” noted law firm Faegre Drinker Biddle & Reath LLP on its blog.

“The litigation around this matter remains pending and open, therefore we are unable to comment beyond that.The Department has and will continue to review the ruling to understand its implications and determine if any interim actions are necessary on long term care insurance rates,” a spokeswoman for the New Hampshire department said last month.

It is unclear what will be the fate of Genworth’s North Carolina shell company which was to house new, modern hybrid-type LTC products under the proposed merger with China Oceanwide. The merger proposition spanned three presidencies in its negotiations, numerous delays, hard-won jurisdictional approvals and re-approvals, a dance with HONY Capital on its potential investment in the Chinese conglomerate — and many lawyers.

2. UPDATE April 11, 2021: DUE to new and unforeseen CONFIDENTIAL CoRPORATE LEGAL Strictures, this personnel move will not take place. Both parties are said to be disappointed. Bodnar, WHO WAS SET TO MODERNIZE THE LTC WORLD UNDER GE’S STEWARDSHIP is currently at Oliver Wyman where he will remain at least through mid-April. Ex-Genworth chief actuary, Vince Bodnar, who had continued his career as a partner at Oliver Wyman after departing Genworth about two years ago, will be joining GE on or around April 19th as its chief claims modernization officer, he says, to help with its LTC portfolio through a new approach to claims reduction among its insurers and retrocessionaires. This modern approach utilizes pre-claims intervention models under development now and gleaned from membership-driven continuing care communities in the U.S.

The veteran actuary will be responsible for developing and implementing these pre-claims intervention programs along with other similar initiatives with LTC blocks GE has reinsurered over the years even as it has run up great liabilities for these benefit-rich policies. It has been more than three years since GE Capital announced that after reserve testing its run-off LTC portfolio, North American Life & Health, would take a GAAP pre-tax charge of $9.5 billion for the fourth quarter of 2017, and make statutory reserve contributions of about $15 billion over seven years.

Bodnar, who will report to Tim Kneeland CEO of NALH in Kansas, will help conduct pilot programs to measure impacts of pre-claims interventions in health, wellness and social behaviors to help policyholders stay healthier and more autonomous for longer, pushing off the need for more expensive facility-care.

Bodnar has said that actuaries are learning that the most effective interventions are not health or medical interventions. Instead, they are related to social, community and family caregiver support. The cost of care for the aging has risen far beyond the amount at which long-ago actuaries first priced older LTC policies, and now the industry must figure out ways to address the mammoth shortfall.

On a recent webinar hosted by Oliver Wyman and insure-tech provider Montoux , Bodnar said the LTC insurance industry has close to $200 billion in reserves for their in-force blocks but that the present value of future benefits is well in excess of that.

“If you can improve outcomes by 10%, that is a $20 billion financial impact,” he said during the webinar. “There is a prize besides saving the entire system money here,” Bodnar said. “Most people do want age in their home, reserve value, contribution to society. We owe into our elderly, our society, age in place as long was we can.” There are regulatory hurdles to overcome, from privacy concerns to discrimination worries to rebating issues. At least one leading insurance commissioner has said that regulators are willing to listen.

3. The National Association of Insurance Commissioners will be hosting its executive-level LongTerm Care Task Force Committee April 9 at its virtual spring national meeting.

Reports from subgroups on the multi-state rate review process, reduced benefit options and LTC financial solvency are expected. The rate review process is central to the granting of future premium hike requests across the nation as it strives to create a more consistent approach for reviewing rate increase filings that make sense on an actuarial basis and do not lead to one state subsidizing another’s artificially lower increases. Consumer advocates are concerned about many of the factors at play, including the potential and incidence for lapses after rate increases and lost asset protection after choosing a reduction in benefits from the original policy. Previously, the NAIC’s Executive Committee and the Internal Administration Subcommittee had also considered hiring an outside legal consultant to help them on policy issues regarding the restructuring LTC policies.

Insurance regulators ponder ways to prevent & address racial and gender discrimination by AI

‘Safe Harbor’ for early insurance company violations concept explored

April 2, 2021 — Insurance regulators considering how to wrestle with biased, discriminatory outcomes from artificial intelligence (AI) in both the offering and coverage of insurance discussed the potential of a safe harbor from enforcement companies when they err, with a chance to correct their course.

A panel comprised of regulators, consumer advocates, data specialists and the filmmaker of documentary Coded Bias met virtually March 31 to discuss how to address AI algorithms when they cause disparate impact among people of color and vulnerable populations —or before they can do so.

The National Association of Insurance Commissioners sponsored both the Big Data/Artificial Intelligence forum and the screening of Coded Bias by Shalini Kantayya. The groundbreaking movie premiered at Sundance Film Festival in 2020. 

AI is a gatekeeper of many things from how long a prison sentence someone gets to who gets job or other opportunity and who does not, Kantayya said on the panel.

These same systems, including facial recognition systems that we are trusting so implicitly haven’t been vetted for gender bias or racial bias or even for vetted for some shared standard of accuracy, she said. Kantayya warned that we as a society in using these algorithms blinding  could “roll back 50 years of civil rights advances with AI’s black boxes.”

Jon Godfread, North Dakota insurance commissioner and chair of the NAIC’s Innovation and Technology Task Force, raised the concept of a safe harbor, noting that it is entirely possible to have an AI algorithm go through an auditing process to check for bias and still have a bad outcome. He said there could be a process so the full weight of the regulatory authority won’t come down on the insurer’s head. The outcome could instead lead to a discussion without the threat of a fine that sends a company into bankruptcy or other major problems, he said. 

Companies are going to get it wrong with the best intentions, Godfread warned. He suggested the focus be on going back and making the customer who suffered a discriminatory result whole. It is beneficial to correct the problem early on rather than have it go on for years, he said. 

Godfread acknowledged there would be a liability issue with class action lawyers over bias, but it is better to create a system where failure comes early and is learned from, and problems are corrected. 

Panelist and NAIC longtime consumer advocate Birny Birnbaum also appeared to endorse the idea of a safe harbor for unintentional bias that would be immediately rectified during the group panel discussion.

Birnbaum emphasized the need — and its urgency — to create a data collection system to look at outcomes from the algorithms insurers use, so regulators can assess their impact and how they might discriminate against vulnerable populations and groups with a smorgasbord of assembled available data points. Insurance coverage and selection matters enormously in everything from community development to catastrophe recovery and preparation, according to Birnbaum.

“There is a special need need for insurance regulators to address this quickly and modernize the system for accountability and oversight, Birnbaum said. “We are seeing exponential growth with algorithms. We need concrete steps, not just dialogue.”

State insurance commissioners discussed their ongoing work in the executive-level special Race and Insurance Committee and executive sessions and explorations they have held on diversity within their own organization, the NAIC. 

However, AI bias issues won’t be limited to just insurance regulatory oversight and accountability in the future.

Data scientist Cathy O’Neil, author of Weapons of Math Destruction and a panelist on the forum, noted that discussions on algorithms’ potentially harmful outcomes with the Consumer Protection Financial Bureau have started up again. These talks were dormant during the Trump Administration.

How are we to translate existing laws to rules that data scientists can make sure their algorithms are passing?, O’Neil asked. “The answer is not obvious,” she acknowledged.

It’s not just the CFPB —the use of data in creating disparate impact harm among people of color is getting attention from the very top. Fimmaker Kantayya said that President Joe Biden and Vice President Kamala Harris was well as House Speaker Nancy Pelosi have asked for a screening.

SHIP’s amended rehabilitation plan gets some set-sail dates

Feb. 6, 2021 — Senior Health Insurance Company of Pennsylvania or SHIP is on track for a potential rehabilitation in the third-quarter of 2021 with a hearing scheduled for April 26.

That’s according to new filings in the case and sources involved wit hthe ongoing case of the beleaguered long-term care insurance company with a funding gap of $1 billion it must try and shore up.

However, the few state regulator intervenors are not getting all they hoped for.

The Commonwealth Court of Pennsylvania submitted a case management order Jan. 29, a year to the day after it first entered the initial rehabilitation plan. This plan was amended and resubmitted to the court Oct. 21, 2020.

The hearing will “continue as necessary thereafter, as to whether the proposed rehabilitation plan should be approved, modified and approved, or disapproved,” said Judge Mary Hannah Leavitt in the filing.

The judge imposed a March 22 deadline for any intervening party to respond to the pre-hearing memorandum and any other intervenors’ statements or documents, due March 8.

Leavitt also denied the request by state insurance regulators in Maine, Massachusetts and Washington State to have access to certain exhibits and witness testimony in a Jan. 29 order. The state regulators wanted more detailed information on rate and benefit calculations in the amended rehabilitation plan than the rehabilitation team wanted to share.

The complex and lengthy rehabilitation plan is designed to take help decrease that gap with its assortment of options, various combination of cuts in benefits and increases in premiums for now-elderly policyholders. But the three state insurance regulators have argued that the SHIP rehabilitation plan is crafted “on the backs of current policyholders” with anticipated dramatic and costly changes to their expected course of extensive elderly care.

In addition to the state regulators, intervenors with their own purposes, as listed in the second case management order, include:

  1. Primerica Life Insurance Co.
  2. The National Organization of Life and HealthInsurance Guaranty Associations
  3. Agents and Brokers ACSIA Long Term Care, Inc., Global Commission Funding LLC, LifeCare Health Insurance Plans, Inc., Senior Commission Funding LLC, Senior Health Care Insurance Services, Ltd., LLP, and United Insurance Group Agency, Inc.
  4. Health insurers Anthem, Inc.; Health Care Service Corp; Horizon Healthcare Services, Inc.; and United HealthCare Insurance Company
  5. Policyholders Georgianna I. Parisi and James Lapinski

LTC Needs a Plan C: Long term care insurance deals start with optimism but face regulatory scrutiny & price, cash challenges

Jan. 5, 2020 —

Long term care insurers have valiantly awaited help with buyouts, risk transfer deals and block purchases but that process has been slow or stymied. Help may not be on the way anytime soon.

Genworth Financial‘s one-time financial rescue by China Oceanwide is on the rocks with no closing seen anytime soon, HC2 Holdings is interested in possibly shedding Continental General Holdings LLC in a bid for cash as it unloads other subsidiaries and potential deals involving insurers’ LTC books of business have been put on hold because of the gap between bid and ask prices, according to sources.

Genworth is hosting a call today to discuss moving forward with its contingencies plans including a likely partial IPO of its sturdy mortgage insurance business to address looming debt, which has been on the table since at least this summer as the pending status of the Oceanwide merger, announced in October 2016, neared its fourth year.

Cash availability issues for the $2.7 billion acquisition by the Chinese financial conglomerate appeared to surface soon after Genworth cleared most, if not all , of its state, federal and international regulatory hurdles through approvals and divestments, a time that also coincide with the Covid-19 pandemic. Oceanwide had been trying to secure $1.8 billion in offshore financing from private equity firm Hony Capital since late summer, and then trying to show Genworth the money would come soon as the merger went through a series of extensions, the latest ending Dec. 31 with no renewal this time.

Oceanwide’s real estate arm has been facing financial challenges, with lawsuits and liens filed against it in California.

The San Francisco Business Journal recently reported on a $14.6 million lawsuit filed in November against Oceanwide Holdings and its general contractors for its centering on Oceanwide’s planned San Francisco mixed use tower. This long-standing, unfinished project was reportedly for sale, to be acquired by Hony Capital for $1.2 billion purchase, a deal anticipated to close a couple of times last year, most recently on Dec. 31. It did not, the Business Times wrote. The newspaper instead reported Jan. 4th that Hony bid’s to buy Oceanwide Center “unravels as deadline to close sale is not extended.”

The business paper said it is “unclear whether there is a path forward for Oceanwide and buyer Hony Capital,” and that “Oceanwide said both parties will ‘continue to explore other cooperation opportunities.'”

Likewise, for the LTC deal, no one is giving up, yet, on paper. LU Zhiqiang, chairman of Oceanwide, remained optimistic for acquiring Genworth in a press release Jan. 4. “We believe the value of the transaction is significant for both parties’ stakeholders, and are continuing to work towards completing the transaction with Genworth,” he said.

In concert with the San Francisco real estate woes, a planned Los Angeles Oceanwide residential and retail building remains also unfinished, and is facing $211.7 million in mechanics liens, according to Levelset.com. According to a Levelset article posted in late August, building contractors were owed “nearly $240 million as of July 2020 while in San Francisco, unpaid work claims have reached close to $50 million as of early July 2020.”

Back in June, given the delays brought about by the Covid-19 pandemic coupled with the need for the firming of overseas financing as U.S. regulatory approvals cleared, Genworth began talking about seeking “evidence” of financing abilities from its partner, China Oceanwide.

Specifically, a June 30 press release by the Richmond-based insurer said it expected to see by Aug, 21 that Oceanwide could give it $1 billion from within Mainland China and $1 billion from outside China from Hony Capital or other acceptable third parties to fund the deal. This dance on funding the deal continued throughout the late summer and the fall.

Hony said it has no comment on the deal for now in an email.

Meanwhile, HC2, after acquiring LTC properties such has Continental and then Humana‘s South Carolina LTC business Kanawha Insurance Co. in 2018, is now entertaining an offer for Continental from a director and beneficial owner of the company, Michael Gorzynski for about $90 million, subject to certain adjustments, consisting of, among other things, a combination of $65 million in cash, according to the indication of interest filed with the Securities and Exchange Commission Dec. 10.

It is unclear if regulators will approve this proposed purchase by a director. HC2 and Continental have faced lawsuit activity involving a whistleblower in their LTC businesses, although former hedge fund impresario Phil Falcone has since departed the investment company.

There is at least one other firm potentially waiting in the wings to see how the situation develops, but the cash needed to take on LTC and its ever-deepening reserve issues after years of underpricing and high utilization, is an overriding issue, according to one source.

Other opportunities for LTC include risk-transfer deals, but although chatter on these arrangements marked much of 2020, potential deals now appear dormant due to a wide price gap between pricing between sellers and buyers, according to a market source.

However, not all agree with such cautionary notes.

“Risk transfer discussions are picking up, making it possible that deals could be announced for the first time in over two years,” wrote equity analysts at Evercore ISI in mid-December after meeting with a leading consulting actuary on the subject.

The analysts pointed to late 2021 as a probable time frame, and said partial risk transfer deals are also on the table for companies with larger blocks, where a full risk transfer real might cost too much in terms of dilution.

Evercore, in its research note, extolled greater transparency and understanding of morbidity assumptions taken by insurers because of new actuarial standards instituted by state regulators. The required adjustments help put policies and reserving practices “on an apples to apples basis,” among companies, Evercore said. However, the new, more informed scrutiny from regulators could result in a need for some LTC insurers to plump up their reserves despite the claims improvement engendered by the Covid pandemic, according to the analysts.

Time will tell, but although LTC insurers are now securing premium increases on a more regular fashion from more state regulators, reserve holes loom and there are a few ongoing LTC insolvencies that continue to haunt involved parties and current policyholders.

SHIP’s rehab plan questioned by 3 states who argue for liquidation

Dec. 2, 2020 — State insurance regulators from three states said in a court filing that they aren’t receiving information they need to evaluate the rehabilitation plan of the now-insolvent Senior Health Insurance Company of Pennsylvania, or SHIP.

The three states intervening in the rehabilitation proceedings before the Commonwealth Court of Pennsylvania are Maine, Massachusetts and Washington State.

Specifically, the states have unsuccessfully sought full detailed prepared reports with actuarial models concerning the impact of the now-amended plan and its impact on policyholders generally and from their states, particularly in how these would stack up for policyholders against an actual liquidation of failed long-term care insurer, SHIP.

The three state insurance regulators are concerned that the “differing treatment of policyholders in different States,” based on factors such as previous rate approvals, which are dispensed uniquely state-by-state, will leave some policyholders less well off than they might be in a liquidation, which they argue violates legal precedent of a constitutional standard.

The detailed actuarial “information and modeling is critical to an understanding of the plan and to any evaluation of whether it comports with applicable legal and constitutional standards,” the three intervening states wrote in a Nov. 30 filing in which they were to introduce witnesses for their pleadings.

SHIP has a funding shortfall of more than $1 billion. The rehabilitation plan is designed to take help decrease that gap with its assortment of options, various combination of cuts in benefits and increases in premiums for now-elderly policyholders. But Maine, Massachusetts and Washington State regulators argued that the rehabilitation plan is crafted “on the backs of current policyholders” with anticipated dramatic and costly changes to their expected way of extensive late-life care.

The states also told the court they cannot sufficiently prepare their testimony and exhibits because neither the plan as outlined nor the rehabilitator have shared the detailed analysis and information on actual outcomes for policyholders, theirs included.

“The Rehabilitator, as the proponent of the Amended Plan, has the burden of showing that the Plan satisfies the standards for approval … To date, the State Insurance Regulators have not been apprised of how the Rehabilitator intends to sustain that burden,” they wrote.

“Washington state doesn’t have enough information to be in favor of either rehabilitation or liquidation. Our point is the rehabilitator has the burden to prove that policyholders would be better off under the rehabilitation plan rather than liquidation. Based on the information we have been given to date, that has not yet been proven,” said a spokeswoman for the Office of the Insurance Commissioner for Washington.

The rehabilitator is the insurance commissioner in Pennsylvania, Jessica Altman, along with a special deputy team who oversees the process with necessary actuarial outsourcing.

The goal of the rehabilitation is to prevent a liquidation, which would send SHIP into the hands the state guaranty funds for life and health insurance. It would be the life and health insurers who would then pick up the tab for the shortfall in a liquidation– but only up to the statutory limits for each state. The rehabilaitors feel their plan is better than na liquidation for most of the policyholders most of the time, even with reductions in benefits and price increases.

The only certainty is that someone must pay more than they anticipated to at least partially cover the old promises of the former Conseco Senior Health Insurance Co. — it will be either the policyholders or the industry.

These limits are about $300,000, on average, while many LTC policies are a lot richer in benefits. The annual cost of a private room at a nursing home now exceeds $100,000, while semi-private room nears that amount, according to Genworth Financial‘s annual cost of care survey, released Dec. 2. Assisted living facility annual rates jumped by 6.15% this year to a national median cost of $51,600, it stated. The median cost of a home health aide in the U.S. is $54,912.

“As the scale of the deficit suggests (a deficit of $915 million on liabilities of $2.8 billion is a shortfall of approximately 33%), the revenue increases or benefit cuts that need to be made are large, and the consequences for policyholders are likely to be severe,” the state regulators stated.

U.S. states have historically approached premium increase requests from LTC insurers in a fashion that strove to balance the needs of their consistencies, both the insured and the insurers, as well as public perception. The solvency concerns of these insurers has grown, often direly, due to the grave errors in assumptions at the time the policies were written coupled with modern interest rate environments.

Although the National Association of Insurance Commissioners has undertaken a uniform approach to timely and appropriate rate increases for LTC insurers, the rehabilitation plan for an already insolvent insurer will not benefit from it.

The intervening jurisdictions noted that Altman and her team have chosen to address this cross-state rate “subsidy problem.” They oppose it, argue it is unfair and say it would be applicable not only to SHIP but to “all other national insurers writing types of insurance that are subject to state rate approval.”

“The imposition of different, and much greater, rate increases and benefit cuts in some States than in others will deprive policyholders in the burdened States of contractual benefits at a greater percentage than those in other States. All policyholders, however, paid the premiums they were obligated to pay under the policies and are entitled to receive as much as possible of their contractual benefits,” the states wrote.

“A liquidator takes the policies as she finds them, determines applicable benefits, and … all policyholders nationwide would receive the same distribution percentage, as the statute specifically prohibits subclasses within a priority class,” the states argued after looking at the general menu of benefit cuts and premium hikes the amended rehabilitation plan offered policyholders.

The plan of the rehabilitator though, they said, would “impose different burdens on policyholders in the different States.”

A representative for the rehabilitator did not comment, nor would they in general during legal proceedings, as the court must weigh this filing along with a number of other intervening parties’ narratives of witness testimony and exhibits, all of which were due Nov. 30. However, the rehabilitation team added provisions in the Amended Plan provisions to address many of the state concerns and have shared a lot of detailed information with regulators, according to sources. Most insurance departments throughout the U.S. appear to be on board with the plan.  

The SHIP situation is very serious, said one person with knowledge of the insolvency.

Timeline for SHIP’s insolvency thus far:

Jan. 23, 2020, Pennsylvania Insurance Commissioner Altman filed a petition for an order placing SHIP into rehabilitation.

Jan. 29, 2020 — the Commonwealth Court granted the Petition for rehabilitation and SHIP was placed into rehabilitation.

April 22, 2020 — Commissioner Altman filed the proposed rehabilitation plan.

Oct. 21, 2020– Commissioner Altman filed the amended rehabilitation plan.

This article was updated with comment from Washington State.

OFR advocates prediction markets to help identify systemic risk issues old-school monitoring might miss

Nov. 19, 2020 — The Office of Financial Research is telling the U.S. Congress that the development and use of information markets as a tool for anticipating and managing financial systemic risk would be a valuable complement to the current surveillance system.

In light of the fact that two and a-half dozen high-profile financial stability reviews 2019 failed to recognize a potential pandemic as a threat, conventional monitoring can come up short, according to the OFR, an arm of the U.S. Treasury Department.

“The pandemic illustrated the difficulty for conventional financial stability monitoring to identify true vulnerabilities,” the OFR’s annual report stated.

An information or “prediction” market for systemic risk, where participants who have superior information are rewarded financially while weaker-sourced individuals who wager lose could help reveal hidden information that might forecast or contribute to financial risk, the OFR suggests.

This information might otherwise be costly to ferret out or retrieve, the report’s authors say.

Information or prediction markets are a type of informed wagering with trading done between and among parties looking to make money off the outcome of the way an event breaks or what happens in the future to any number of scenarios. Major U.S. corporations have used them but regulatory barriers remain for wider use, apparently.

“Information markets might facilitate a more suitable allocation of those risks, and thus reduce the chance for systemic crises to emerge,” the paper states. They may also make a market more resilient, as well, according to the thinking, based on some renowned economists’ theories.

Such markets can help to produce forecasts of event outcomes with a lower prediction error than conventional forecasting methods and have been shown capable of producing more accurate and timely signals of weakening financial stability,” argue academic articles, as quoted by OFR. Other citations follow with the same general thesis.

The OFR, which was created under the Dodd-Frank Act a decade ago with a charge to give a report annually to the federal legislators that created it, also noted the obvious — that COVID-19 pandemic has affected all systemic risk categories and increased overall market uncertainty.

The categories the OFR deems high risk now are macroeconomic risk, with potential inflation caused by government intervention and credit risk from highly leveraged corporations, with the potential for defaults and bankruptcies.

Market risk is elevated, but not high, with help from the Federal Reserve, but that could change if valuations rise for not-so-healthy assets, the paper warned.

On the moderate risk scale are liquidity and funding, also helped, along it the markets, by the Federal Reserve’s stabilization efforts, according to the OFR. This also could change.

However, codependence between large providers and users of short-term funding remains a key vulnerability.

On the low end of the risk assessment scale is leverage in the financial system itself, while insolvency and octagon risks “appear contained,” the OFR said. Fortunately, leverage in the U.S. financial system has been restrained since the last financial crisis.

For insurers and banks, the capital buffers now in place “appear to provide an adequate cushion for unexpected losses” in the short term, at least.

The risk posed by cybersecurity threats, natural disasters, Brexit and the transition this fall to alternative reference rates from the old LIBOR system are also potential vulnerabilities are for financial stability overall, the OFZR notes.

The paper also mentions the development of quantum computing presents a longer-term risk.