Editor’s Note: Due to inaccurate information provided by a source, details within this column regarding CNO Financial Group, Inc. and Beechwood Re have been corrected.
WASHINGTON — There was a time when small business owners and middle-income wage earners of the baby boomer generation who were concerned about the potentially searing impact on family finances of an unexpected catastrophic illness deemed long-term care insurance to be a must-buy.
But declining consumer interest in LTCI has been noticeable in the new century.
There are 11 carriers today offering LTC coverage, down from 70 in 2000, according to Jesse Slome, executive director of the American Association for Long-Term Care Insurance. And only 105,000 new LTC contracts were sold in 2015, Slome says, down from a peak of approximately 700,000 new contracts sold in 2000, including those involved in group contracts.
Of greater concern, however, is the fact that a host of factors converged over the past few months to place in doubt the ability of LTC issuers to pay off current commitments. These developments also confirm the doubts of naysayers who have for years questioned the ability of insurers to sustain product sales.
Consider these recent comments by Joseph M. Belth, professor emeritus of insurance at Indiana University, who said: “For 25 years I have been saying that the problem of financing LTC cannot be solved through private insurance because the LTC exposure violates important principles necessary for the private functioning of insurance.”
While problemsolving around LTC has yet to emerge as a public policy issue, the industry’s problems have become so intense that many industry veterans, including state insurance regulators, are concerned about the potential impact on the viability and credibility of state guaranty funds as well as the future of state insurance regulation itself.
The issue was the subject of a hearing held in August by the Federal Insurance Office, a hearing prompted by the fact that health insurers are on the hook for LTC industry losses, as far as state regulators are concerned, and have been crying foul, not only to state regulators but to the White House.
Also in August, Maryland Democratic senators Ben Cardin and Barbara Mikulski wrote to the U.S. Office of Personnel Management to “convey the shock and anger of federal employees who have been informed of a dramatic increase in premiums for the federal LTC program.”
The senators also asked for public hearings on the issue, a plea that was ignored by Senate leadership. They acted after John Hancock Life and Health Insurance Co. said rates for federal employees and retirees enrolled in the program will jump up to 126 percent, with the average increase being 83 percent, or $111 a month.
At the same time, during an American Council of Life Insurers meeting in October, officials of the trade group discussed the formation of an “interstate compact” that would allow LTC policy premiums to be approved by state regulators at “actuarially sound levels.” This would limit the ability of guaranty funds to assess life and health insurers to make up for the inability of LTC insurers to pay their claims in full.
Insurers also want to insulate themselves from the political storm that would accompany huge increases imposed on policyholders if they are forced to either pay up or lose the entire investment in their policies. And, the ACLI is developing a public relations strategy to deal with the potential fallout of regulators or state legislators approving such a policy.
To those who discount the intensity of regulators’ concern about the impact of the crisis on state insurance regulation, and point out the crisis has so far taken place under the radar, I point to the conference call Tom McInerney, chairman and CEO of Genworth Insurance Co. had with analysts Friday regarding its proposed deal to be acquired by a Chinese insurer, China Oceanwide Holdings Group, Ltd.
During the call, McInerney disclosed that the company had recently participated in a conference call with all 50 state insurance regulators where the deal was explained in detail. He also addressed analysts’ concerns about prior comments by McInerney that it has the support of Delaware insurance regulators for the deal even though the state’s insurance commissioner, Karen Weldin Stewart, was defeated in a primary election. Ergo, a new commissioner will be ruling on the deal.
Genworth has apparently been negotiating with China Oceanwide since March, when it also announced a plan to “separate and isolate” the company’s LTC business. It had hoped to complete this deal in the first half of 2017, but has since backed off, saying only a portion of the isolation plan would be completed by then, and further action would be taken to separate the LTC operations only as the LTC operations improve.
Separately, when it announced the merger deal, Genworth also took an after-tax charge of $535 to $625 million linked to its LTC claim reserves and taxes.
But Genworth’s problems are not the only issue. As the economy soured starting in 2008, several insurance companies started placing their LTC operations in runoff. The first to do so was Conseco, Inc., now CNO Financial Group, Inc. According to Belth, Conseco has poured $915 million of capital into that unit, called Conseco Senior Health Insurance Co., in order to keep it solvent.
The plan of separation, according to Belth, provided for Conseco to create an independent trust in Pennsylvania, transfer CSHI to the trust, and rename the company Senior Health Insurance Company of Pennsylvania. The plan was approved by the Pennsylvania insurance commissioner. He later testified that he approved the plan because Conseco had threatened to allow CSHI to become insolvent if he’d rejected the plan.
Last year, in another sign of financial trouble, SHIP borrowed $50 million by issuing a five-year surplus note to Beechwood Re. SHIP has not made an interest payment on the note, and Belth said whether SHIP will remain solvent “remains to be seen.”
And in July, Beechwood Re was linked to Platinum Partners, a hedge fund that is under investigation by the Securities and Exchange Commission and two sets of federal prosecutors.
A year after Conseco spun off its troubled LTC unit, in 2009, Penn Treaty, an LTC based in Pennsylvania, became insolvent. Most recently, in July, the Pennsylvania insurance commissioner sought to place the company in liquidation after determining that, “As of May 2016, [Penn Treaty] has admitted assets of less than $454 million, liabilities exceeding $4.28 billion, and a resulting surplus deficit of more than $3.82 billion,” said Teresa D. Miller, the state’s insurance commissioner, in a court filing. Miller added that the insolvency will “deepen over time,” and that the firm is projected to run out of assets in 2018.
It is unclear what will happen, including whether the problems grows so bad and the public outcry is so great that Congress and the incoming president will be forced to become involved.
Belth says state insurance regulators, who approve premium increases on LTC insurance policies, are caught between a rock and a hard place.
“When they approve increases requested by the companies, policyholders are furious because of the financial burden placed on them,” he says. On the other hand, Belth says, when the regulators deny requested increases, companies may be forced into insolvency. “Regulators often compromise by allowing part but not all of the increases, and require companies to offer policyholders the option of benefit reductions instead of increased premiums.”
For his part, Slome sees the issue as a national problem.
“Americans are getting older, every single day the American population is aging and the government has no plan in place even though it is clear that individuals have fewer dollars saved for retirement,” Slome says. “Someone needs to address this matter in a comprehensive way.”
He notes that individuals are buying life insurance products that pay an LTC benefit. But, he says, selling policies to a few hundred thousand people helps a few hundred thousand people, “but you are dealing with a global issue… Something else has to be done; stakeholders have to sit down and come to some sort of agreement as to what the choices are, and what the solution is.”
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