State regulators are wondering how well they can handle long-term care insurers that go broke.
The Receivership Model Law Working Group, part of the National Association of Insurance Commissioners, is taking a hard look at the NAIC's Life and Health Insurance Guaranty Association Model Act. The working group is deciding whether the NAIC should update the model to "address issues arising in connection with the insolvency of long-term care insurers."
The NAIC is a Kansas City, Missouri-based group for insurance regulators. All the NAIC can do is develop "models," or examples of what regulators think a good law, regulation or guideline should look like. State regulators themselves determine when an insurer is so poorly managed or so short on assets that a receiver must take control. Each state decides for itself whether it wants to set up guaranty associations, or other mechanisms, to back the obligations of insolvent insurers, and what rules to apply to its associations.
One thing the Receivership Model Law Working Group discovered in 2015, when it conducted a general receivership survey, is that insurance company receivership rules vary widely from state to state. But the NAIC does shape what regulators and insurers think and do, even when states want to go their own way. Any LTCI-related changes the NAIC makes in guaranty association laws could affect which LTCI issuers live, which issuers die, which of your long-term care planning clients get guaranty association protection, and how guaranty association protection really works.
Late last year, the working group asked for comments on whether it should make LTCI-related changes to the receivership model.
Here's a look at who sent the working group comments, and some of what the commenters said.
The International Association of Insurance Receivers offered two sessions on long-term care insurance at a recent workshop in Austin, Texas. (Photo: iStock)
1. The players
The list of commenters includes the state insurance regulatory agencies in Michigan, Nebraska and Pennsylvania; Cigna Corp. and UnitedHealth Group Inc.; and the American Council of Life Insurers and the Blue Cross and Blue Shield Association.
The list also includes Romeo Raabe of The Long Term Care Guy — a Green Bay, Wisconsin-based long-term care planning firm.
Three submissions came from people at the heart of the long-term care insurance receivership support community:
Patrick Cantilo, an Austin, Texas-based lawyer who has been serving as the deputy special rehabilitator for Penn Treaty Network America Insurance Company, which is now being liquidated.
Peter Gallanis, president of the Herndon, Virginia-based National Organization of Life and Health Guaranty Associations.
Jonathan Bing, first vice president at the King of Prussia, Pennsylvania-based International Association of Insurance Receivers.
Cantilo has played a visible role in the Penn Treaty receivership.
NOLHGA has been quiet, but it regularly gives the public reminders that it exists.
IAIR has been even more quiet than NOLHGA, but it has been holding regular in-person sessions at the NAIC's in-person meetings, and it also holds annual workshops of its own, in February.
At IAIR's last three-day workshop conference, in Austin, Texas, the group offered two separate sessions on long-term care insurance. One panel focused on potential sources of capital for LTCI issuers. Another panel looked for lessons for receivers in the Penn Treaty story. One takeaway from the IAIR workshop agenda is that several professional services firms already have a strong interest in the LTCI receivership market.
Cigna says health insurers wrote 3 percent of the LTCI business and may pay 75 percent of LTCI insolvency assessments. (Photo: Thinkstock)
In most states, life and health insurance guaranty associations cover most of the cost of insolvencies by imposing assessments on member insurers. Many state associates separate the funding for life insolvencies and health insolvencies.
Because of the history of long-term care insurance, the associations typically classify LTCI as a health risk, rather than a life risk, even though the most visible issuers have been better known for their life and health products than for their health products.
Health insurers have taken Pennsylvania insurance regulators to court to try to reduce their potential exposure to guaranty association assessments in connection with the Penn Treaty insolvency.
That conflict also shows up in the Receivership Model Law Working Group comments.
Health insurers and others have complained elsewhere that health insurers may be on the hook to cover about 75 percent of the guaranty association assessments related to the Penn Treaty insolvency.
Amy Lazzaro, a vice president at Bloomfield, Connecticut-based Cigna, wrote in Cigna's comment letter that, as this point, health insurers may pay 75 percent of the LTCI failure assessments even though they write only 3 percent of the LTCI premiums now in the market.
"This is patently unfair to major medical policyholders," Lazzaro wrote. "Health companies understand and welcome the opportunity to be part of the solution to this problem. The health companies, however, cannot shoulder the lion's share of this burden alone."
Health guaranty associations also have to cope with the wave of health insurer failures that occurred in 2015 and 2016, and Penn Treaty "is only the first major LTC writer to become insolvent," Lazzaro wrote.
Kim Holland, a vice president at the Chicago-based Blue Cross and Blue Shield Association, also objected to the current role of health insurers in covering the cost of LTCI issuer insolvencies.
"The guaranty fund system was put in place for the financial protection of consumers, not to shift risk from one industry sector to another at the expense of policyholders," Holland wrote.
But Wayne Mehlman, senior counsel at the Washington-based American Council of Life Insurers, said regulators should think hard before tinkering with the assessment rules for life, health and annuity products.
"The assessment mechanism was intentionally designed this way in order to ensure adequate assessment capacity for each of the three main types of insurance," Mehlman wrote. "We would strongly oppose any proposal that would shift all or most of the LTC-related assessment burden from the health insurance account to the life insurance and annuity accounts."
Only 13 percent of health insurance groups have ever sold stand-alone LTCI, but only 22 percent of life insurance groups have sold stand-alone LTCI, Mehlman wrote.
Many players are asking how the long-term care benefits riders sold with life and annuity products will fit in. (Image: Thinkstock)
Many commenters said the Receivership Model Law Working Group should update the model law to make it clear which insurers should pay the assessments when an issuer of a life insurance product or annuity product that offers long-term care benefits fails.
Wayne Mehlman, the ACLI commenter, argued that the shift toward life-LTC and annuity-LTC hybrids might be reshaping U.S. long-term care benefits guaranty exposure.
"It appears that some LTC-related assessment exposures are already beginning to migrate from the health insurance assessment accounts to the life insurance and annuity assessment accounts," Mehlman wrote.
Insurance company receivers wish they saw buyers out looking for LTCI block bargains. (Photo: Lee Karney/U.S. Fish & Wildlife Service)
Insurance agents and brokers might feel sad when they think of corporate raiders hovering over struggling insurers.
The insurance company receivers hoping to rehabilitate failed LTCI issuers wish they saw a few vultures circling overhead.
Jonathan Bing, the IAIR commenter, wrote that, traditionally, in the life and annuity sectors, a solvent insurer assumes the business written by an insolvent insurer. The assets of the insolvent insurer and cash from the guaranty association help pay for the solvent insurer to take responsibility for the insolvent insurer's business.
In the stand-alone LTCI market, in part because of the difficulty insurers face when asking for premium increases, and in part because policies and claims last so long, "there is limited or no market for LTCI blocks," Bing wrote.
That lack of a market for blocks of LTCI business makes managing an insolvent LTCI issuer more difficult than managing a typical insolvent life or annuity issuer.
A long-term care planner says states should at least coordinate guaranty association LTCI benefits with Medicaid nursing home benefits. (Photo: Thinkstock)
Several commenters told the Receivership Model Law Working Group that the NAIC should think about ways to improve protection for policyholders, or about ways to be tough enough on policyholders to make blocks of LTCI business financially viable.
Randi Reichel, a vice president at UnitedHealth, said regulators have to let guaranty associations that take responsibility for blocks of LTCI business raise rates enough to make the blocks sustainable.
"The purpose of guaranty funds should not be to provide policyholders with benefits or premiums unsustainable in the market, but to provide continuation of coverage," Reichel wrote. "If a company has become insolvent because its rates are inadequate, good public policy demands that those inadequate rates are not perpetuated at the expense of state budgets and health insurance policyholders."
Several commenters said the NAIC and guaranty associations should clarify whether the associations will guarantee the extra coverage provided by LTCI inflation protection features.
James Gerber, the director of receiverships at the Michigan Department of Insurance and Financial Services, said guaranty association rules must address coverage mechanics.
Gerber gave this example of a question he often gets: When a state guaranty association covers $500,000 in LTCI benefits, and the holder of a $500,000 LTCI policy has already used $100,000 in policy benefits, "does the guaranty association deduct the $100,000 of benefits already paid under [the] policy from their maximum, or do they pay their maximum in addition to what has already been paid?"
Romeo Raabe of The Long Term Care Guy suggested that states could use Medicaid nursing home benefits programs to ease the sting of LTCI issuer failures.
Purchasers of LTCI policies eligible for a state's Long Term Care Partnership program are supposed to be able to keep extra assets if they do run out of private LTCI benefits and end up using Medicaid nursing home benefits.
Raabes hopes states will apply that principle to holders of LTCI policies from insolvent insurers.
"Consider any LTCI policy that ends up collecting from the guarantee fund to be partnership-eligible," Raabe wrote. "If someone has a lifetime benefit, and the company goes under and benefits are limited to $300,000, then at least allow the person who took the initiative to insure to collect Medicaid, no matter what their asset level is once the guarantee funds run out."
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