State regulators are wondering how well they can handle long-term care insurers that go broke.
The Receivership Model Law Working Group, part of the National Association of Insurance Commissioners, is taking a hard look at the NAIC's Life and Health Insurance Guaranty Association Model Act. The working group is deciding whether the NAIC should update the model to "address issues arising in connection with the insolvency of long-term care insurers."
The NAIC is a Kansas City, Missouri-based group for insurance regulators. All the NAIC can do is develop "models," or examples of what regulators think a good law, regulation or guideline should look like. State regulators themselves determine when an insurer is so poorly managed or so short on assets that a receiver must take control. Each state decides for itself whether it wants to set up guaranty associations, or other mechanisms, to back the obligations of insolvent insurers, and what rules to apply to its associations.
One thing the Receivership Model Law Working Group discovered in 2015, when it conducted a general receivership survey, is that insurance company receivership rules vary widely from state to state. But the NAIC does shape what regulators and insurers think and do, even when states want to go their own way. Any LTCI-related changes the NAIC makes in guaranty association laws could affect which LTCI issuers live, which issuers die, which of your long-term care planning clients get guaranty association protection, and how guaranty association protection really works.
Late last year, the working group asked for comments on whether it should make LTCI-related changes to the receivership model.
Here's a look at who sent the working group comments, and some of what the commenters said.
The International Association of Insurance Receivers offered two sessions on long-term care insurance at a recent workshop in Austin, Texas. (Photo: iStock)
1. The players
The list of commenters includes the state insurance regulatory agencies in Michigan, Nebraska and Pennsylvania; Cigna Corp. and UnitedHealth Group Inc.; and the American Council of Life Insurers and the Blue Cross and Blue Shield Association.
The list also includes Romeo Raabe of The Long Term Care Guy — a Green Bay, Wisconsin-based long-term care planning firm.
Three submissions came from people at the heart of the long-term care insurance receivership support community:
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Patrick Cantilo, an Austin, Texas-based lawyer who has been serving as the deputy special rehabilitator for Penn Treaty Network America Insurance Company, which is now being liquidated.
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Peter Gallanis, president of the Herndon, Virginia-based National Organization of Life and Health Guaranty Associations.
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Jonathan Bing, first vice president at the King of Prussia, Pennsylvania-based International Association of Insurance Receivers.
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Cantilo has played a visible role in the Penn Treaty receivership.
NOLHGA has been quiet, but it regularly gives the public reminders that it exists.
IAIR has been even more quiet than NOLHGA, but it has been holding regular in-person sessions at the NAIC's in-person meetings, and it also holds annual workshops of its own, in February.
At IAIR's last three-day workshop conference, in Austin, Texas, the group offered two separate sessions on long-term care insurance. One panel focused on potential sources of capital for LTCI issuers. Another panel looked for lessons for receivers in the Penn Treaty story. One takeaway from the IAIR workshop agenda is that several professional services firms already have a strong interest in the LTCI receivership market.
Cigna says health insurers wrote 3 percent of the LTCI business and may pay 75 percent of LTCI insolvency assessments. (Photo: Thinkstock)
2. Responsibility
In most states, life and health insurance guaranty associations cover most of the cost of insolvencies by imposing assessments on member insurers. Many state associates separate the funding for life insolvencies and health insolvencies.
Because of the history of long-term care insurance, the associations typically classify LTCI as a health risk, rather than a life risk, even though the most visible issuers have been better known for their life and health products than for their health products.
Health insurers have taken Pennsylvania insurance regulators to court to try to reduce their potential exposure to guaranty association assessments in connection with the Penn Treaty insolvency.
That conflict also shows up in the Receivership Model Law Working Group comments.
Health insurers and others have complained elsewhere that health insurers may be on the hook to cover about 75 percent of the guaranty association assessments related to the Penn Treaty insolvency.
Amy Lazzaro, a vice president at Bloomfield, Connecticut-based Cigna, wrote in Cigna's comment letter that, as this point, health insurers may pay 75 percent of the LTCI failure assessments even though they write only 3 percent of the LTCI premiums now in the market.
"This is patently unfair to major medical policyholders," Lazzaro wrote. "Health companies understand and welcome the opportunity to be part of the solution to this problem. The health companies, however, cannot shoulder the lion's share of this burden alone."
Health guaranty associations also have to cope with the wave of health insurer failures that occurred in 2015 and 2016, and Penn Treaty "is only the first major LTC writer to become insolvent," Lazzaro wrote.
Kim Holland, a vice president at the Chicago-based Blue Cross and Blue Shield Association, also objected to the current role of health insurers in covering the cost of LTCI issuer insolvencies.
"The guaranty fund system was put in place for the financial protection of consumers, not to shift risk from one industry sector to another at the expense of policyholders," Holland wrote.
But Wayne Mehlman, senior counsel at the Washington-based American Council of Life Insurers, said regulators should think hard before tinkering with the assessment rules for life, health and annuity products.
"The assessment mechanism was intentionally designed this way in order to ensure adequate assessment capacity for each of the three main types of insurance," Mehlman wrote. "We would strongly oppose any proposal that would shift all or most of the LTC-related assessment burden from the health insurance account to the life insurance and annuity accounts."
Only 13 percent of health insurance groups have ever sold stand-alone LTCI, but only 22 percent of life insurance groups have sold stand-alone LTCI, Mehlman wrote.
