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State insurance regulators are facing a painful fight over the liquidation of two troubled long-term care insurance (LTCI) issuers: Penn Treaty Network America and Penn Treaty’s sister, American Network Insurance Company.

State guaranty funds are already using assessments imposed on life insurers to supplement the company’s assets and pay benefits up to each state’s guaranty limit.

Life insurers want administrators to use Penn Treaty’s assets to try to make up some of the difference between the state guaranty limits and what the policyholders paid for.

A coalition of health insurers wants administrators to cap benefits at the state guaranty limits, and not to use Penn Treaty’s remaining assets to make for the gap,

(Related: How State Guarantees Work For Current LTCI Claimants)

Members of the Receivership and Insolvency Task Force, a panel that’s part of the National Association of Insurance Commissioners, have been posting interest group letters concerning the battle on the panel’s section of the NAIC’s website.

Penn Treaty and its sister company, American Network Insurance Company, helped create the modern LTCI market.

The companies ran into trouble because problems with underpricing and inaccurate assumptions about policyholder behavior and investment returns.

Pennsylvania regulators won court permission to liquidate the companies in 2017.

In most states, guaranty funds aim to provide about $300,000 to $500,000 in LTCI benefits per policyholder.

Instead of paying regular premiums into a pot, each insurer makes an assessment payment when another insurer that belongs to the same guaranty association fails.

Health insurers recently persuaded the NAIC to change the model guaranty fund rules to have states rely on life insurers, not health insurers, to back up LTCI policy benefits. Technically, LTCI has been classified as a kind of health insurance, but most of the major issuers have been known primarily as life insurers, not as health insurers.

Chris Petersen of Arbor Strategies LLC, which is representing the health insurers, said a court ruling in Pennsylvania appears to support the position that the regulators administering the Penn Treaty estate should limit benefits payments to what the guaranty funds provide.

“The health insurers seek to permit the Penn Treaty court to make its own decision in the Penn Treaty liquidation,” Petersen wrote. “The health insurers are ensuring that the Receivership Act is administered in accordance with controlling legal authority in the state in which the question has been raised.”

Good stewardship requires insurers to look after the guarantee funds’ rights to recoup some of the assessment money they have paid in from the insolvent insurer’s estate, Petersen wrote.

Wayne Mehlman, senior council at the American Council of Life Insurers, said regulators should try to use the Penn Treaty estate assets to help the policyholders.

“To us, it would be detrimental to the underpinnings and reputation of the life insurance industry if the  uncovered benefit claims of our policyholders were denied and not entitled to partial satisfaction from an insolvent company’s estate assets,” Mehlman wrote.

Patrick Cantilo, who helped administer Penn Treaty while it was in rehabilitation, and before it was being liquidated, wrote to say that regulators should favor using the Penn Treaty assets to help increase the amount of benefits the policyholders get, and that the approach the health insurers have proposed would be a “denial of policyholder protection unprecedented in the annals of U.S. insurance regulation.”

“Let these Penn Treaty policyholders recover what they can of the more than $1.5 billion in estimated uncovered LTC benefits,” Cantilo wrote. “In the best of cases they will still suffer an aggregate loss of more than $1 billion.”

Cantilo said it paints a poor picture of the big health insurers to see them “work so hard to deprive these aged policyholders of these benefits when they need them most.”

— Read Life Insurers May Have to Share LTCI Issuer Failure Billson ThinkAdvisor.

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