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Penn Treaty Aside, LTC Reinsurance Market Is Viable

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Despite the experience of Penn Treaty Network America in Allentown, Pa., which was recently put into rehabilitation, experts say reinsurance is available for long term care carriers.

Among those companies that say they are actively looking to reinsure LTC insurance is Munich American Reassurance Co., Atlanta, according to Jim Sweeney, executive vice president and COO.

“We are and continue to be active in the market,” says Sweeney, who notes that MARC is interested in quota share business as well as LTC/Annuity combo business.

When MARC looks at quota share business, it uses current assumptions on interest and lapse rates, not the assumptions originally used by the direct writers, he says.

Other factors that figure in on whether MARC agrees to reinsure business include underwriting claims control mechanisms and due diligence, and not just actuarial assumptions, according to Sweeney.

Thus, he explains, reinsuring a block of business depends more on the assumptions made than on whether it is a new or old block of LTCI. But Sweeney does note that, in general, in the industry, there are some older blocks that haven’t met interest, lapse and, in some cases, morbidity assumptions.

Steve Johnson, deputy insurance commissioner with the Pennsylvania insurance department, says that the cost of reinsuring Penn Treaty’s LTCI business had gone up dramatically, which resulted in the block of business being recaptured from Imagine International Reinsurance, Ltd., Dublin, its reinsurer. Both the department and the company, Johnson says, agreed that the cost of the treaty had gone up dramatically and the new cost would not be good for the company or its policyholders.

But the recapture of the contract put Penn Treaty into a negative capital and surplus position and as a result the department gave the company 90 days to either renegotiate the treaty or to find another reinsurer, he says.

When it couldn’t reach an agreement by the agreed upon date of Jan. 1, 2009, it was put into rehabilitation, Johnson explains.

Penn Treaty, which has been in business since 1972, started writing contracts at a time when no good data was available on claims, he says. The number of policies written rose in the 1980s and 90s and Penn Treaty was part of that trend, Johnson adds.

The industry did not foresee that people would hold onto their policies, he says. The industry predicted a lapse rate of 4%-5% when in fact it turned out to be only 1.5%, he explains. This trend is coupled with the fact that people are living longer, he says.

The situation only started to change with revisions to a model law developed by the National Association of Insurance Commissioners, Kansas City, Mo., in which the requirement of an actuarial opinion that rates are adequate led to higher prices and a more stable market, according to Johnson.

What will help with pricing, he explains, is the increased optionality in products that allows consumers to better mix and match cost and need.

As the market evolves, reinsurers are trying to assess the risk associated with these products and differentiating between the risk on older blocks and newer blocks of business, where there is more experience available, Johnson says. Newer pricing reflects the 1.5% lapse rate, he explains.

When a fear factor, in which those with contracts are afraid of being left without care, is combined with greater optionality and pricing, the risk of writing LTC insurance and reinsuring it should be more predictable going forward, Johnson says.


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