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South Carolina Official Blasts LTCI Issuer Rehab Plan

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What You Need to Know

  • SHIP has 31,693 insureds, $1.4 billion in assets and $2.6 billion in policyholder liabilities.
  • Regulators in Louisiana and South Carolina have sued, saying the rehabilitation plan is unfair.
  • The Pennsylvania insurance commissioner says the suits are without merit and inappropriate.

A state insurance regulator is heating up his fight against the current rehabilitation plan for a failed long-term care insurance (LTCI) issuer, Senior Health Insurance Company of Pennsylvania (SHIP).

South Carolina Insurance Commissioner Ray Farmer said Tuesday that he told Pennsylvania Insurance Commissioner Jessica Altman — who is acting as SHIP’s statutory rehabilitator — that he will decline either to opt his state in or to opt it out of her SHIP rehab plan.

Farmer has sued to block the SHIP rehabilitation plan. He said in  the announcement about his refusal to opt in or out of the plan, that implementing the rehabilitation plan would be a tragic injustice for SHIP policyholders in South Carolina.

“Ultimately, this will be an issue decided by the courts, but my job is to protect South Carolina policyholders and that’s what I am going to do,” Farmer said.

“Until I am directed by a court of competent jurisdiction, I will not participate in implementing a plan that seeks to put the interests of the industry over those of 87-year-old policyholders at a point in their lives when they may need their policyholder benefits the most.”

Insurance regulators in Louisiana have taken a similar position on the rehabilitation plan and filed a similar suit.

Altman has argued that the suits are without merit and are inappropriate.

For financial professionals, the outcome of the fight could shape how states handle future LTCI issuer failures. The fight also may shape the state response to other problems resulting from inaccurate insurance company product pricing assumptions.

SHIP

SHIP is the modern incarnation of American Travellers Life Insurance Company, a company that helped create the modern U.S. LTCI market in the 1980s.

Conseco, a company that’s now known as CNO Financial Group, acquired American Travellers in 1996. CNO ended up with a block of LTCI business built both from direct policy sales and from reinsurance arrangements.

CNO pumped $534 million into the LTCI business in an effort to stabilize it, but, by 2004, regulators were already deeply concerned about the business, and Florida insurance regulators were helping the company restructure the LTCI obligations.

The Pennsylvania Insurance Department agreed in 2008 to let Conseco set up SHIP in Pennsylvania and move 140,000 American Travellers-related LTCI policies there. SHIP was a nonprofit company that was supervised by a trust. The oversight trust board included former U.S. Surgeon General C. Everett Koop and two former state insurance commissioners.

The performance of the business continued to deteriorate.

At the end of 2020, SHIP had 31,693 premium-paying policyholders and 4,971 insureds on claim, according to Altman’s quarterly report on SHIP’s status.

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The company as a whole lost $306 million in 2020 on $1.4 billion in assets. It had $2.6 billion in policyholder liabilities, and a $1.2 billion deficit.

The company had an average of $42,630 in assets per insured, and $80,280 in liabilities.

The Rehab Path

The Pennsylvania SHIP rehab plan calls for a state’s insurance regulators to opt in to the plan or opt out.

If South Carolina opts in, Pennsylvania can let SHIP raise rates in South Carolina, and, in some cases, premiums might increase more than 500%, Farmer said.

If South Carolina opts out, SHIP could reduce benefits for South Carolina policyholders with approval from South Carolina regulators, he said.

“We do not believe Pennsylvania has authority to raise rates or lower benefits for South Carolina consumers,” Farmer said.

Rehab v. Liquidation

A Pennsylvania court put SHIP in rehabilitation in 2020. Altman says in the SHIP rehab plan that “the paramount goal” of the plan should be protection of policyholders.

A complicating factor is that insurance companies have no federally backed equivalent of the Federal Deposit Insurance Corp. Instead, each state runs its own guaranty fund program, which offers some protection against insurer failure. In most states, the guaranty limit for LTCI coverage is $300,000.

When an insurer fails, the surviving insurers usually must pay assessments to make good on the guarantees. To keep one insurance company failure from killing the surviving insurers, the guaranty funds limit the percentage of premium revenue that an insurer must contribute in any given year.

The nature of the arrangement means that, in the event of a large insurer failure, a guaranty fund could take years to pay the Benefit’s protected by guaranty arrangements.

But Farmer has argued that a rehabilitation process — which, in theory, leaves open the possibility that a failed insurer could be sold, or revived in some other way — is inappropriate for SHIP.

“Many states, including South Carolina, believe this company should have been placed into liquidation a long time ago and that all the Pennsylvania rehabilitator is doing is wasting the assets of the insurer,” Farmer said in a list of answers to frequently asked questions posted on the South Carolina Department of Insurance website.

Pictured: Ray Farmer (Photo: South Carolina Department of Insurance)