Long-term care insurance policies were initially developed in the late 1960s to supplement Medicare skilled care payments for nursing home care. By 1990 policies had evolved to cover a wide range of non-skilled long term care services including home care and assisted living as well as non-skilled nursing facility care.
The market was there. A majority of elderly Americans require long term services and supports at some point during their lives. Unfortunately traditional private long-term care insurance (LTCI) has failed to live up to early expectations as an effective means to meet that risk.
Twenty years ago the market for LTCI was busy with over 100 companies selling policies. One company active in central and northeastern Pennsylvania was Penn Treaty Insurance. Penn Treaty distinguished itself by its lax underwriting standards. It was very easy to qualify for a Penn Treaty policy. The underwriting and benefits appeared to be “too good to be true” and made Penn Treaty policies very risky.
And, as all the companies learned, the traditional LTCI model was flawed. As described in a National Association of Insurance Commissioner Report:
As required by state insurance laws, private LTCI policies were always sold as guaranteed renewable—they could only be cancelled for non-payment of premium—and as level-funded. While the premium charged varied by age at purchase, once an individual purchased a policy, the premium was designed (although never guaranteed) to be level for life. Finally, almost all policies reimbursed the actual costs of care up to a daily benefit maximum.
The level-funded nature of the product persists to this day and poses unique challenges to insurers. Insurers can only adjust premiums subject to regulatory approval if experience is countering their pricing assumptions. Most insurers’ LTCI policies issued before the mid-2000s have seen adverse experience when compared to their original pricing assumptions. Rising claims, low mortality and lower than expected lapses have led to higher prices often unaffordable to a large segment of the affected population. A number of insurers have also opted out of the market, leaving only a relatively few insurers to provide much needed LTCI products. The State of Long-Term Care Insurance: The Market, Challenges and Future Innovations, National Association of Insurance Commissioners, May 2016
Even companies with stronger underwriting standards and deeper pockets than Penn Treaty have failed to weather the devastating conditions for LTCI. Most companies selling individual stand-alone LTCI policies exited the unprofitable market. Sales of traditional individual policies declined from 754,000 policies in 2002 to only 129,000 policies by 2014. New models of long term care coverage have now appeared that are hybrid products based on annuities or universal life or whole life insurance.
In this environment Penn Treaty’s aggressive LTCI underwriting made it particularly vulnerable to disastrous failure. It was forced into receivership and eventual liquidation by the Commonwealth of Pennsylvania. Here is how the situation of Penn Treaty and its subsidiaries were described in a 2015 Pennsylvania court opinion.
The Companies’ troubles began in the 1990’s, when they widely sold policies carrying generous benefits, which proved to be underpriced and poorly underwritten. These policies are referred to here as “OldCo policies,” because by 2002 the Companies were issuing better underwritten policies (the “NewCo policies”) which became profitable. The financial fallout from the sale of OldCo policies, however, resulted in the involvement of numerous state regulators, including the Pennsylvania Insurance Department, which commenced an eight-year period of formal supervision of the Companies. Rate increases for OldCo policies were a linchpin in the Companies’ prospects for improving their financial condition, but these required approval from state regulators across the nation, and efforts to obtain such approval attained disparate results. The inability to secure enough increases, and the Companies’ deteriorated solvency, apparently led to their ultimate consent to rehabilitation [and eventual liquidation]. In Re Penn Treaty Network, PA Supreme Court, July 20, 2015.
On March 1, 2017 the Pennsylvania insurance commissioner announced it is now completing the final liquidation of Penn Treaty. Fortunately, policyholder losses are mitigated somewhat due to the existence of the state guaranty association system. Nevertheless, 50 percent of policyholders are expected to have claims in excess of what will be paid by the guaranty association.
Here is the Press Release Issued by the Pennsylvania Insurance Commissioner on 03/01/2017
Insurance Commissioner Announces Court Approval of Liquidation of Penn Treaty and American Network Insurance Companies; Assures Policyholders Claims Will Be Paid by State Guaranty Funds Pursuant to State Law
Harrisburg, PA - Insurance Commissioner Teresa Miller today announced the Commonwealth Court approval of petitions to liquidate Penn Treaty Network America Insurance Company and American Network Insurance Company, with policyholder claims to be paid through the state guaranty association system, subject to statutory limits and conditions.
“After a long and difficult eight-year legal process, the Court’s decision to approve the liquidation recognizes the companies’ financial difficulties are too great to be remedied, and that consumers are best protected through the state guaranty association system,” Commissioner Miller said.
Commissioner Miller said the two companies have approximately 76,000 policyholders nationwide, with 9,000 residing in Pennsylvania. More than 98 percent of Penn Treaty and American Network’s policies are long term care insurance.
Over the past several years, long term care insurance has posed significant challenges to insurers on a national level. The pricing of these policies for many insurance companies has proved to be insufficient as a result of claims greatly exceeding expectations and low investment returns. Claims have exceeded expectations due to incorrect assumptions concerning the number of policyholders who would drop their coverage and the number of policyholders who would utilize their policy benefits, as well as the cost of providing those benefits. The pricing deficiencies and resulting financial losses have resulted in many long term care insurers seeking large premium rate increases and some leaving the market.
In the case of Penn Treaty and American Network, the Pennsylvania Insurance Department determined that the magnitude of additional premium rate increases needed to remedy the companies’ financial difficulties (exceeding 300% on average) would severely harm policyholders and would not be permitted by state regulators, leaving no alternative other than to place the companies into liquidation.
“Policyholder claims will continue to be covered by the state guaranty association system pursuant to law, and policy claims will be paid subject to the applicable state guaranty association coverage limit and conditions. Policyholders should continue to file claims as they have been in the past, and must continue to pay their premiums in order to be eligible for guaranty association coverage,” Commissioner Miller said. “State guaranty associations were created to protect state residents who are policyholders of an insolvent company that has gone out of business. In each state, other insurance companies licensed in that state pay into a guaranty fund, and that money is used to cover claims when a company becomes insolvent and is liquidated.”
Under Pennsylvania law, claims of policyholders residing in Pennsylvania are paid up to the maximum amount provided for by the policy, subject to the guaranty association cap of $300,000. The liquidator and the court will determine whether any payments for claims above the cap can be made from the companies’ remaining assets to any policyholders who may have claims in excess of the cap. Actuarial models show about 50 percent of policyholders are expected to have claims in excess of what will be paid by the guaranty association covering their policies.
Guaranty associations may seek to increase premiums. Any guaranty association rate increase will be subject to approvals required by law which, depending on the state, may include a review process similar to rate requests filed by long term care insurers with state insurance regulators.
Policyholders should continue making premium payments to the following address: Penn Treaty, P.O. Box 70257, Philadelphia, PA 19176-0257. Claim submissions should continue to be sent to: Penn Treaty, P.O. Box 7066, Allentown, PA 18105-7066. Policyholders with questions about policies, claims, or related to liquidation should call Policyholder Services at 1-800-362-0700.
Consumers can also contact the Insurance Department Bureau of Consumer Services at www.insurance.pa.gov, or 1-877-881-6388.
The State of Long-Term Care Insurance: The Market, Challenges and Future Innovations, National Association of Insurance Commissioners, May 2016 (downloads a .pdf file).