Heading Off Track
A Pennsylvania long-term care insurer is the newest member of the cohort of insurers that have been ordered into rehabilitation over the years. Improved regulations and risk-based capital standards, however, are significantly slowing down that trend.
- Lori Chordas
- May 2020
- Through the Years: Over the past 25 years, hundreds of insurers have been ordered into rehabilitation or liquidation by insurance commissioners in their home states.
- Fallen on Hard Times: One of the newest members to that list is long-term care insurer Senior Health Insurance Company of Pennsylvania, ordered into rehabilitation on Jan. 29.
- On the Mend: Improvements to state laws and regulators’ abilities to see into the financial stability of companies is now driving down the number of insurers being ordered into receivership.
Senior Health Insurance Company of Pennsylvania was once part of a growing cohort of U.S. long-term care insurers.
But by the middle of 2019, inaccurate actuarial assumptions and poor pricing on LTC products, lower-than-expected income on invested assets and unexpected changes in the market had taken a significant toll on the company and its bottom line, leaving it with fewer than 48,000 policyholders and a nearly $500 million surplus deficit, said Patrick Cantilo, the co-founder and managing partner of law firm Cantilo & Bennett.
In January, Pennsylvania officials ordered SHIP into rehabilitation—the first step to insolvency for some companies.
SHIP is not alone. Since 2018, a handful of other insurers have been handed a similar fate.
Last year the Superior Court of Wake County, North Carolina placed Colorado Bankers Life Insurance Co. in rehabilitation. This past March, private passenger auto insurer Windhaven National Insurance Co. was ordered into liquidation, just one month after being placed into rehabilitation by the Texas Department of Insurance.
Rehabilitation is used by state insurance regulators to deal with financially troubled companies. If the court approves, the court appoints the regulator as rehabilitator, said Joseph M. Belth, professor emeritus of insurance at Indiana University.
The objective, he said, is to preserve the company “to allow it to emerge from rehabilitation as a going concern. To meet that objective, the rehabilitator may modify the company's operations, sell the company in whole or in part, merge the company into another company, or change provisions of the company's policies. When rehabilitation fails, liquidation is a last resort. If the court approves, state guaranty associations become involved in an effort to minimize the losses to policyholders.”
The rehabilitation of insurance companies has long grabbed national headlines.
During the 1990s in Florida, Hurricane Andrew, which in today's dollars generated nearly $29 billion in insurance claims payouts, led several of the state's insurers into rehabilitation before eventually forcing some to go belly-up, including Regency Insurance Co., Great Republic Insurance and Ocean Casualty Insurance.
For SHIP, the path to needing rehabilitation has been long and winding.
The company opened its doors in 1887 as the Home Beneficial Society, and in the mid-1990s was acquired by Conseco and renamed Conseco Senior Health Insurance Co. After years of financial ebbs and flows, Conseco's assets at the turn of the 21st century stood at $2.32 billion, according to AM Best.
Challenges with the LTC business led the company to stop selling new policies in 2003. It was spun off by Conseco and, in discussions with the Pennsylvania Department of Insurance, was transferred to newly-formed nonprofit Senior Health Care Oversight Trust to run off SHIP's remaining long-term care policies.
In 2008, SHIP began running off Conseco Senior Health's LTC business, which had been in runoff for five years before SHIP took over the business, Belth wrote in a Dec. 9, 2019 blog post.
Last summer SHIP, after filing an annual statement revealing the company to be insolvent, was given an opportunity to regain its financial footing in the market by filing a corrective plan with state regulators. But the company could not devise a plan to restore the insurer's risk-based capital above the required company action level, according to the state filing.
After years of financial struggles that finally came to a head, on Jan. 29 Commonwealth Court of Pennsylvania President Judge Mary Hannah Leavitt ordered SHIP into rehabilitation, appointing Pennsylvania Insurance Commissioner Jessica Altman as SHIP's rehabilitator and imposing an April 22 deadline to file a preliminary rehabilitation plan for the company.
In late March, Cantilo, the special deputy rehabilitator appointed by Altman to manage SHIP's rehabilitation, was busy crafting that plan. He said it will offer existing policyholders a series of options to pay more premium or reduce “underpriced” benefits, in an attempt to stave off liquidation.
State regulators are doing “a tremendous job of supervising insurers, and they’re working hard to attempt to turn them around if they get into financial trouble.”
National Organization of Life and Health Insurance Guaranty Associations
Since 1991, regulators around the country have ordered more than 80 life and health insurers doing business in multiple states into some form of receivership.
A number of property/casualty insurers, too, have fallen on hard times over the years, and between 1993 and 2017, 305 became insolvent, according to the National Conference of Insurance Guaranty Funds, a nonprofit, member-funded association that provides national assistance and support to state P/C guaranty funds.
Recently, however, the number of financially impaired insurers ordered into rehabilitation or liquidation has tapered off significantly across all lines.
“In fact, we're now only seeing about two to five a year,” said NCIGF's chief executive officer, Roger Schmelzer.
Among the small cohort of insurers that succumbed to that fate in 2019 was Kansas-based medical professional liability insurer Physicians Standard Insurance Co., which was placed in rehabilitation in August under the supervision of the state's insurance department.
Also last year, the insurance commissioner for Puerto Rico announced in September the liquidation of Integrand Assurance Co. which had been hit hard by claims arising from Hurricane Maria and had been recently placed under regulatory supervision by the insurance department. In October 2019, Integrand Assurance announced plans to appeal the liquidation order.
Improved data and information gathering, which facilitates better pricing and reserve setting, has helped fuel a decrease in rehabilitations and liquidations, Schmelzer said.
He also credits improved state regulation and risk-based capital standards with “refining regulators' ability to see into companies and make judgements about whether they can remain viable.”
The good news, Schmelzer said, is that most insurers can.
But that hasn't always been the case.
The rehabilitation of SHIP is yet another black eye for the long-term care industry, which over the years has taken a hit due to low investment returns, higher-than-expected claims and poor pricing.
In 2017, the LTC market experienced one of the most significant insurer failures.
On March 1, 2017, Penn Treaty Network America and its subsidiary American Network Insurance Co. were ordered into liquidation by the Commonwealth Court of Pennsylvania after mispriced premiums, increasing life spans, low interest rates and an eight-year legal battle made it impossible for the company to keep its head above water.
Cantilo, who has worked on Penn Treaty's rehabilitation in addition to SHIP's, sees several similarities between the two LTC writers.
Along with comparable actuarial considerations, both carriers, he said, “have very similar policies, although the average age of Penn Treaty's policyholders is a bit younger—at around 80, compared to mid-to-late 80s for SHIP's policyholders.”
Also, at the time of rehabilitation, both companies were saddled with a growing deficit and tumbling assets.
At year-end 2018, SHIP's total assets had fallen to $2.19 billion from more than $2.9 billion in 2014, according to AM Best.
By the time Penn Treaty moved from rehabilitation to liquidation, it had just $500 million in assets to cover long-term care claims projected at that time to be $4.6 billion, according to the Pennsylvania Insurance Department.
Poor pricing of policies, Cantilo added, also severely impacted the insurers' bottom lines, particularly for Penn Treaty, which had a reputation for aggressively pricing LTC products.
That's been a challenge for many LTC writers over the years.
When long-term care insurance burst onto the scene in the 1970s, little data was available to show how the liability would perform over time.
“Actuaries and insurance executives that designed the product established benefits and prices based on assumptions about policyholder behavior derived from other lines of insurance, such as life, health and disability,” Cantilo said. “Fifty years later, we're seeing that wasn't an efficacious way of making assumptions because those liabilities behave very differently.”
Assumptions about how often and how long LTC policyholders would go on claim and how much it would cost for those claims often were inaccurate.
“Only over time did we learn that policyholders hold onto LTC policies much more fiercely than other lines, and lapsation rates for LTC policies are much lower than for other areas,” Cantilo said. “Those kinds of miscalculated assumptions can have a dire consequence on an insurer's financials, such as with Penn Treaty and what we're now seeing with SHIP.”
Regulators and others in the industry are hoping to change that.
Last year, the National Association of Insurance Commissioners convened a Long-Term Care Insurance Task Force charged with developing a consistent national approach for reviewing LTC insurance rates that result in actuarially appropriate increases being granted by the states in a timely manner, and eliminates cross-state rate subsidization.
Improved state regulation and risk-based capital standards are helping to drive the decline in the number of insurance company rehabilitations and liquidations, and “refining regulators’ ability to see into companies and make judgements about whether they can remain viable.”
National Conference of Insurance Guaranty Funds
The Road Ahead
While the number of insurance companies being placed into receivership has recently declined, there are some concerns that lower interest rates and unprecedented changes to the economy caused by the global outbreak of COVID-19 and other issues could again drive that trend upward.
But National Conference of Insurance Guaranty Funds' Schmelzer is hopeful that improved regulation, conservatively managed companies with high reserves and a well-capitalized insurance industry will help the industry weather those storms and keep insurers solvent.
The industry was put to the test during the 2008 global financial crisis.
However, “no nationally significant life or property/casualty insurer” became insolvent during that time, said Peter Gallanis, president of the National Organization of Life and Health Insurance Guaranty Associations, NCIGF's counterpart in the life/health sector.
Less fortunate, smaller insurers that succumbed to that fate during that time “had less than $1 billion in combined liabilities to policyholders, most of which was fully protected through the insurance receivership process and guaranty associations,” Gallanis wrote in a chapter of the book, Modernizing Insurance Regulation.
Insurance guaranty associations are state-sanctioned organizations that protect policyholders and claimants after an insurer is placed into liquidation.
“Today state regulators are doing a tremendous job of supervising insurers, and they're working hard to attempt to turn them around if they get into financial trouble,” Gallanis said.
Insurers, too, are doing their part through ongoing critical assessment of their own operational and financial risks, said Gallanis, who prior to joining NOLHGA was a special deputy insurance receiver for the state of Illinois, where he managed the administration of 80 insolvent domestic insurers across all lines.
SHIP is hopeful that it has the tools needed to regain the confidence of regulators and receivers.
However, some fear that may be a tall order for a company that ended 2018 with a net loss of $0.5 billion and total liabilities that exceeded total admitted assets by $0.44 billion, according to SHIP's financial statements.
But Cantilo remains optimistic.
Many of SHIP's policies provide very generous coverage that's not necessarily indispensable to policyholders, he said.
“If we can have them reduce their coverage to what they need and reduce liability substantially to get closer to what we can afford to pay over time, we're hoping we can avoid liquidation and continue providing meaningful coverage to the company's remaining 48,000 policyholders,” Cantilo said.
A Promise Made
After Penn Treaty Network America was ordered into liquidation by the Commonwealth Court of Pennsylvania in 2017, solvent insurers, their owners and others were left to pick up the cost of claims for the company's 76,000 aging policyholders through state guaranty associations.
Since that time, the guaranty associations of the states where policyholders reside have paid more than $2.5 billion in claims to Penn Treaty policyholders, said Peter Gallanis, president of the National Organization of Life and Health Insurance Guaranty Associations.
NOLHGA, a voluntary association made up of life and health insurance guaranty associations of all 50 states and the District of Columbia, was founded in 1983 to help the associations coordinate their efforts to provide protection to policyholders impacted by life and health insurance company insolvencies.
Insurers are required to be a member of the insurance guaranty association in every state in which they sell policies to protect the interests of their insureds and beneficiaries if a company is placed in liquidation.
Guaranty funds were created in the late 1960s “as a promise kept on a promise made” to maintain an essential safety net for policyholders by covering the outstanding claims of insolvent insurers, said Roger Schmelzer, CEO of the National Conference of Insurance Guaranty Funds, NOLHGA's counterpart in the property/casualty market.
Guaranty fund payouts are set by the statutes establishing the guaranty association in a state and typically pay the amount of coverage stipulated by the policy or $300,000, whichever is less.
Since the 1980s, NOLHGA's life and health insurance guaranty associations have provided protection to more than 2.6 million policyholders, guaranteed more than $25.6 billion in coverage benefits and contributed nearly $8.97 billion toward the fulfillment of insurer promises.
In the property/casualty market, the guaranty fund system has paid out more than $30 billion on approximately 600 insolvencies since 1976, Schmelzer said.
Today, the overall assessment capacity of the P/C guaranty fund system, which renews annually, tops $8.8 billion, he said.
The overall assessment capacity for the life and health guaranty system, which also renews annually, is more than $13 billion, Gallanis said.
Guaranty associations in Texas and Florida are gearing up to soon begin paying claims of policyholders impacted by the recent liquidation of two P/C insurers in their states.
In March, private passenger auto insurer Windhaven National Insurance Co. was ordered into liquidation at the request of the Texas Department of Insurance, just two months after its parent Windhaven Insurance was liquidated by the Florida Department of Financial Services.
The Florida guaranty association will be hardest hit. Around the time of the order, Windhaven Insurance had 54,187 policies in force and 5,427 open claims, according to the Texas Department of Insurance.
In Texas, Windhaven National reported 6,066 policies in force and 548 open claims, as of Feb. 23, according to the state's insurance department.
The department has been appointed Windhaven National's liquidator, and Risk and Regulatory Consulting LLC is the special deputy receiver in charge of conducting the liquidation.
According to the order, Windhaven National failed to have admitted assets at least equal to all its liabilities together with the minimum surplus of $5 million required to be maintained.
Life and health insurance guaranty associations are once again standing at the ready, in the event their statutory obligations are triggered, to pay claims for another LTC insurer whose future hangs in the balance.
On Jan. 29, Senior Health Insurance Company of Pennsylvania was ordered into rehabilitation by the Commonwealth Court of Pennsylvania. Pennsylvania Insurance Commissioner Jessica Altman, SHIP's rehabilitator, and Patrick Cantilo, the special deputy rehabilitator in charge of managing the rehabilitation, had until April 22 to file a preliminary plan to rehabilitate the company.
However, if the plan fails and SHIP is eventually ordered into liquidation, “such an order of liquidation would trigger the statutory obligations” of guaranty associations in about 46 states to step in and pay the claims of the company's policyholders, Gallanis said.