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What happens if health insurers fail?

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The U.S. Supreme Court could soon issue a ruling, on King vs. Burwell (Case Number 14-114), that could put any health insurers with big individual health insurance operations in an actuarial blender.

Problems with the three big Patient Protection and Affordable Care Act of 2010 (PPACA) risk-management programs could put insurers through a three R’s food processor.

In theory, as the insurers are dealing with PPACA-related confusion, Middle East respiratory syndrome (MERS) claims could pour in the door, as mandatory quarantines force insurers to have many employees work at home, as everyone else is working at home and clogging up home Internet access services.

And, in 2014, before the big storms came, as a few drops of PPACA rain began to fall, two health carriers failed: South Carolina Health Cooperative, a nonprofit, employer-member-owned multiple employer welfare arrangement (MEWA) that had no reinsurer or guaranty association backing for any kind, and CoOportunity, a nonprofit, member-owned PPACA CO-OP insurer that did have guaranty association backing. 

Guaranty associations are the organizations that are supposed to step in and take over responsibility for claims when insurers collapse. The guaranty associations play a role for the insurance industry that’s similar to the role the Federal Deposit Insurance Corp. (FDIC) plays in the banking industry.

CoOportunity had about 100,000 enrollees in Iowa and Nebraska in late 2014, before news of financial problems surfaced, and insurance regulators said the guaranty associations in the states would have to deal with about $80 million in unpaid claims that had piled up, or about $800 in unpaid claims per enrollee. 

Regulators tried to get as many CoOportunity enrollees to shift into new plans as possible in the weeks before the plan was liquidated, but the company still had about 13,000 enrollees when it entered liquidation. The rules are complicated, but, in theory, the guaranty associations could be covering some enrollees for up to six months, and they could have to provide up to $500,000 in benefits protection for some enrollees.

The CoOportunity story, and the storm clouds gathering on the horizon, raise the question: What happens if many health plans fail at the same time? Could the failure of one health insurer somehow lead to a series of failures, by exposing solvent but shaky insurers to big guaranty association assessment bills at the worst possible time?

For a brief look at the guaranty associations that are supposed to protect the policyholders when insurers fail, read on.

Stone wall

1. Each state has a life and health guaranty association that’s walled off from the property-casualty guaranty association, and the life and health associations separate health obligations from life and annuity obligations.

The National Association of Insurance Commissioners (NAIC) adopted the current update of Model 520, the Life and Health Insurance Guaranty Association Model Act, in 2009.

Most states have adopted guaranty association rules based on Model 520, according to meeting minutes from an NAIC working group meeting that took place in October 2014.

The model sets a limit of $300,000 in guaranty fund benefits protection per long-term care insurance (LTCI) insured, and a $500,000 limit per major medical insured.

Each licensed life and health insurer in a state belongs to the state’s guaranty association, and each association member is supposed to share responsibility for helping to provide benefits protection for the insureds of the insurers that fail.

State guaranty funds may set different limits on guaranty fund protection, In Iowa, for example, the guaranty fund is providing only six months of protection for CoOportunity enrollees. The enrollees have to find other coverage within six months.

The coverage limits may make life difficult for the affected insureds, but they also help provide some protection for the guaranty association’s own resources. 

In some states, CO-OPs may be licensed in such a way that the enrollees are not eligible for guaranty fund protection.


2. Guaranty associations generally fund payouts by assessing the solvent insurers in the association.

Guaranty associations usually do not fill emergency funds by charging members regular dues. Instead, the associations impose assessments on member companies when insurers fail.

The NAIC model act limits the risk that one insurer’s failure could kill other insurers by limiting an association to imposing an assessment equal to 2 percent of a member’s annual premiums.

Life operations use life premiums to calculate the assessments for helping the policyholders of failed life companies; and health operations use health premiums to calculate the assessments for helping the policyholders of failed health insurers.

In 2013, for example, U.S. insurers reported about $570 billion in premium revenue on health statements, suggesting that they could come up with about $11 billion in assessment money.

Each state’s association has responsibility only for its state’s insurers. 

See also: Guaranty Associations: The Nation’s Safety Net

Zipped lips

4. You may not see guaranty association managers rushing out to describe how their programs work.

The Federal Reserve Board is famous for being quiet about efforts to help banks, and the state guaranty associations are at least as careful about what they say about their efforts to protect insurance company policyholders’ benefits.

Even the basic notices the associations and insurers use to tell consumers about the guaranty associations are subject to long discussions.

See also: California Updates Guaranty Fund Notice Requirements

One reason the guaranty associations are so careful is to avoid scaring consumers away from buying any insurance, to avoid making stable insurers unstable by putting questions in consumers’ mind, and to avoid giving consumers unrealistic ideas about the level of protection that guaranty associations can offer.

Still another reason is to avoid encouraging brokers and sophisticated customers to do business with obviously shaky insurers, by implying that policyholders can be confident in the ability of the guaranty associations to protect policyholders from insolvencies. 

Guaranty associations want customers to be confident enough in insurance to buy insurance, but not to be overly confident enough to reward intentionally reckless insurers for being reckless.