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

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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