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Life insurers are clashing with health insurers over what should happen to long-duration insurance policies when the issuers fail and state guaranty associations step in.

Health insurers want the default to be for protection to be limited to a state’s guaranty limits. They want to see receivers to get court permission before using a failed insurer’s own assets to fill in holes in guaranty fund protection.

Life insurers want the default to be for the receiver to use the insolvent insurer’s assets to fill in guaranty protection holes, to make sure the policyholders get coverage close to what the policyholders were originally promised.

(Related: 9 Long-Term Care Insurance Claim Whisperer Secrets)

Members of the National Association of Insurance Commissioners’ Receivership and Insolvency Task Force talked about receivers’ use of a failed insurer’s assets during a conference call meeting, and at an in-person meeting in November.

The task force has included an account of the discussions in a meeting packet for an upcoming in-person session set to take place April 7, at the NAIC’s spring national meeting in Orlando, Florida.

Warrantech Case

Task force members began to talk about the topic in response to a Pennsylvania Supreme Court ruling on Warrantech Consumer Products Services Inc. v. Reliance Insurance Company in Liquidation.

The court held that an insolvent insurer should deny any claims received more than 30 days after liquidation, unless the claims were covered by the guaranty association, and that the assets of the insolvent insurer should not be used to pay any claims above guaranty fund limits more than 30 days after the liquidation.

State Guaranty Associations

State guaranty associations take over paying the claims for insolvent insurers, using a combination of a failed insurer’s assets, investment earnings on the failed insurer’s assets, and assessment payments from guaranty association members. States usually require certain insurers to join certain types of guaranty associations.

The association members usually do not pay large guaranty association premiums to prefund guaranty fund obligations. Instead, they pay large assessments to cover the obligations that come due when insurers fail.

Traditionally, state insurance regulators have classified stand-alone long-term care insurance (LTCI) as a health insurance product. Because of that approach, health insurers have been responsible for shouldering much of the cost of the failure of Penn Treaty, an LTCI issuer that became insolvent in 2017, even though companies typically thought of as life insurers have written most LTCI coverage.

Perspectives

The American Council of Life Insurers has expressed alarm about the Pennsylvania ruling and asked the Receivership and Insolvency Task Force to make sure the Pennsylvania approach does not end up applying to life insurance, annuities or LTCI.

The ACLI believes “the application of Warrantech to LTCI and life/health products is counter to every interpretation of receivership and guaranty association frameworks,” and that it would be “detrimental to the reputation of the industry if policyholders cannot rely on the protections that have been in place for decades,” according to a meeting summary in the Receivership and Insolvency Task Force meeting packet.

Chris Peterson of Arbor Strategies, a representative for the health insurers, has told the task force in a letter that it does not have to address the matter, because the matter is still in litigation, and the Pennsylvania ruling involves a state-specific law, not a model law, or recommended law text, developed by the NAIC.

Patrick Cantilo, a receivership law expert, has told the task force that he believes that, if Pennsylvania had adopted the NAIC’s model language, that would have eliminated the current concerns.

He has suggested that the task force should declare that its sense is that “the abrogation of life, health, or long-term care insurance provided by the policies of an insolvent insurer through implementation of provisions that limit such coverage to guaranty fund limits are contrary to public policy,”

Task force members ended up agreeing to start by monitoring the situation and surveying states to what rules are really in place at the state level.

Resources

A link to the spring meeting materials packet is available here, under the Meeting Materials tab.

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