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Long-Term Care Insurers Worry Guaranty Associations: NOLHGA President

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What You Need to Know

  • The United States has separate guaranty associations for the life sector and for the property and casualty sector.
  • The NOLHGA president says no life and health insurers of major significance have failed because of either the 2008 financial crisis or the COVID-19 pandemic.
  • He said designers of LTCI issuer restructuring mechanisms need to avoid saddling society with the risk of an increased number of insolvencies.

A representative for the organizations that protect customers against life and health insurer insolvencies wants policymakers to think carefully about long-term care insurance company restructuring rules.

Peter Gallanis, the president of the National Organization of Life and Health Insurance Guaranty Associations, told state insurance lawmakers this past summer that he would like to be talking more to them about efforts to develop rules for LTCI issuer restructuring efforts.

The challenge is “how to be able to do that in a way that accomplishes good but doesn’t saddle society with the risk of an increased number of insolvencies,” Gallanis said at a National Council of Insurance Legislators meeting session in Boston, according to draft meeting minutes included in a materials packet for NCOIL’s upcoming meeting in Scottsdale, Arizona.

Guaranty Associations

Every state and the District of Columbia use guaranty associations to protect insurance policyholders against the risk of issuer insolvencies.

States have separate guaranty associations for life, health and annuity issuers and for issuers of property and casualty coverage.

The life, health and annuity guaranty associations formed the National Organization of Life and Health Guaranty Associations in 1983. Gallanis has been the president of NOLHGA since 1999.

Many consumers have never heard of guaranty associations, Even many insurance professionals are vague about how the associations work.

Most life and health guaranty associations rely mainly on the premium revenue flowing into insolvent insurers, and on assessments from solvent insurers, to make good on the guarantees.

States protect the solvent insurers by capping how much insurance coverage a guaranty association will protect, and by capping how much any one insurer can be required to pay for guaranty association assessments in any given year.

But guaranty associations want consumers and their insurance advisors to look carefully at insurance company finances before buying policies. To avoid increasing “moral hazard,” or the risk that customers will rely on guaranty association protection to avoid having to think about insurers’ soundness, states often limit what insurers and agents can tell consumers about the guaranty associations.

Officials with the U.S. Treasury Department, for example, mentioned concerns about the effects of knowledge of the existence of guaranty associations on insurance customer moral hazard in a 2008 report on modernizing the U.S. financial regulatory structure.

Life and Health Insurer Stability

At the NCOIL meeting, Gallanis told state lawmakers that the life and healthy guaranty associations have had more than enough capacity to handle the insolvencies that have occurred in recent decades.

No life or health insurer of major significance has failed either as a result of the 2008 financial crisis or as a result of the COVID-19 pandemic, Gallanis said.

Even when failures do occur, “insurance is really not subject to run-on-the-bank behavior, and that’s because the liabilities usually come due over a very long period of time, which means that our cash needs are a lot lower than what the FDIC, for example, needs when a bank fails,” Gallanis said.

Long-Term Care Insurance Issuers

U.S. insurers wrote billions of dollars in long-term care insurance coverage in the 1980s, 1990s and early 2000s, when interest rates were higher than they are today and information about how policyholders would use LTCI coverage was scarce.

In recent years, many issuers have stopped writing new LTCI coverage and implemented big premium increases. Some, including Penn Treaty, have become insolvent.

“I would say that our biggest challenges over the last 10  years and likely our biggest challenges over the next 10 years have been in the area of LTC,” Gallanis said. “We literally could spend five hours talking about LTC.”

Gallanis noted that workstreams at the National Association of Insurance Commissioners and NCOIL have been focusing on LTCI issues.

“As we move forward, what we are really hoping to do, as we have been doing for a long time, is to use the experience we’ve gained to work with legislators, regulators, industry and other stakeholders to make sure we are prepared for whatever happens to come down the pipe in the future,” Gallanis said.

(Photo: Katarzyna Bialasiewicz/iStock)


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