Long-Term Care Insurers May Have to Keep Their Policies: Regulators

State insurance regulators are trying to develop rules that insurers could use to transfer blocks of business to other entities with finality, without worries about whether responsibility for the claims will come back to haunt them.

Many issuers of long-term care insurance (LTCI) would love to transfer responsibility for blocks of LTCI business to another entity.

But members of the Restructuring Mechanisms Working Group — a team at the National Association of Insurance Commissioners — say in a new draft white paper that reserving for LTCI “liabilities,” or benefits, may be too complicated for LTCI to be included in the insurance business transfer framework they’re trying to create.

Regulators have raised the possibility, however, that they could create another risk restructuring mechanism for LTCI issuers.

The working group posted a draft of the white paper on its section of the NAIC website earlier this week. A white paper is a report that summarizes what an organization thinks about a complicated issue.

Comments on the white paper are due Nov. 22.

For financial professionals, the white paper could eventually lead to rules that could determine what organizations end up really being responsible for paying clients’ life insurance claims, disability insurance claims and annuity benefits.

Transferring Responsibility

Today, U.S. insurers in most states can sell an entire insurance company affiliate. They can also pay for another company to assume responsibility for an unwanted block of insurance policies or annuities by paying for a reinsurance agreement.

But, if a reinsurer fails, the company that originally wrote the business will be responsible for paying the claims.

The United Kingdom lets insurers pass full responsibility for blocks of business on to other insurers through insurance business transfer arrangements.

Arkansas, Oklahoma, Rhode Island and Vermont are examples of U.S. states that have developed insurance business transfer rules based on the U.K. model.

The Restructuring Mechanisms Working Group is developing rules other states could use to copy Arkansas and Oklahoma.

One question for U.S. regulators is what they can do to protect consumers’ interests.

In the United Kingdom, for example, the U.K. Court of Appeals ruled that the only party with any responsibility to consumers who bought annuities from Prudential PLC of London — which has no connection with the U.S. Prudential — was the legal entity that wrote the annuities.

The court held that a lower court “should not have accorded any weight to the fact that the policyholders had chosen Prudential based on its long-established reputation, age and venerability,” according to a summary of the U.K. ruling included in the draft white paper.

Long-Term Care Insurance Blocks

U.S. insurers wrote billions of dollars of LTCI business from the 1970s through around 2010, when interest rates were higher and insurers knew little about how LTCI might really work.

Issuers now face low yields on the bond portfolios supporting the LTCI business and the discovery that consumers are much more likely to hold on to LTCI policies and eventually file claims than issuers had assumed when pricing the policies.

The white paper drafters say letting LTCI issuers use a new insurance business transfer system to transfer LTCI benefits liabilities would probably be too complicated, because deciding what LTCI reserves should be is so difficult.

“The working group acknowledges that, regardless of whether some state laws would permit it, use of a corporate restructuring mechanism in certain lines, such as long-term care, is likely to be subject to a great deal of opposition and higher capital requirements for the insurers involved,” the drafters continue.

Another problem, the drafters say is that LTCI policyholders have much less ability than corporate entities to defend their interests in court.

“This fact, along with the traditional inability of insurers to properly estimate future liabilities in this line of business, makes it a line of business that likely is not appropriate for restructuring mechanisms,” the drafters. “This conclusion, however, could be refuted if the appropriate plan addresses these issues and provides benefit to the policyholders.”

The Restructuring Mechanisms Working Group has formed a child of its own, the Long-Term Care Insurance Restructuring Group, to “identify and assess potential legal and regulatory issues arising from a corporate transaction that would seek to legally separate certain long-term care policies from the general account of the issuing insurer.”

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