Long Term Care Insurance and the Conseco Block – Part II
By Martin McBirney
Introduction
On November 12, 2008 the Pennsylvania Department of Insurance approved Conseco's Oversight Trust Form A application with no substantive changes, and so ushered in a new era for Long Term Care Insurance (LTCI) policyholders across the nation. By granting Conseco's request, the Department not only altered the immediate fate of nearly 150,000 LTCI policyholders, but potentially that of many others. Quite simply, they handed the LTCI industry a bail out strategy.
How the Conseco policyholders will fare remains to be seen. Whatever the case, it seems fairly clear that their fate will reveal itself within the next three to four years, at most. The average age of these individuals is around 80, putting them in the "meat" of the claims curve, and any plan deficiencies will show themselves quite quickly at this stage. And while it would be reassuring to believe that the newly formed Senior Health Insurance Co. of Pennsylvania (SHIP) will survive its policyholder responsibilities, its prospects at the outset are not encouraging.SHIP, an ironic acronym in itself, was launched with a number of its sails aflutter. Included in the final agreement were the following:
- "Side deals" with certain states; rates that vary dramatically across policyholders of the same age and benefit level;
- A near term rate increase request of just under 50 percent filed prior to the establishment of the trust;
- Five more planned rate increases into the future;
- An imperiled capital base;
- A dismal first review from the nation's leading insurance rating agency;
- A wholesale lack of disclosure to the affected policyholders.
The Side Deal
Buried within the regulatory structure of LTCI is a requirement that insurers offer policyholders nonforfeiture options in the event of a "substantial" rate increase. While this generally applies to policies purchased within the last 5 to 6 years, its principles were applied in settling a rate increase law suit against Conseco relative to the policies within SHIP. Conseco, in turn, violated the terms of this settlement and one state held the regulatory hammer over its head to pry out favorable treatment for its own state's policyholders.
While this provides an advantageous alternative for the lucky few, it will not work across the nation. The regulatory mechanism in question grants paid-up coverage equal to total premiums paid, less any claims incurred. For many Conseco policyholders, this is nearly equal to the maximum benefits payable on their policies. Such policyholders would therefore be eligible for fully paid up coverage. Available reserves for the business in total might fund 20 percent to 30 percent of maximum benefits payable, so a cannibalizing mechanism is being set up.
Expect law suits to follow if substantially inequitable treatment of different states' policyholders follows. In combination with the rate inequities discussed below, a very good case could be built relative to discriminatory treatment. The legal costs alone would imperil the capital base of SHIP. Actual settlement amounts would send it immediately into Receivership and Liquidation.
Rate Increases
SHIP's solvency is based on 5 future rate increases equal to $300 to $400 million. Such a series of price increases will easily double today's already elevated premiums. A near 50 percent increase prior to this schedule will cripple a large swath of individuals. Coupled with the spousal premium waiver mechanism that accompanies 2/3 of the block's policies, annual premiums in the range of $10,000 will not be uncommon.
Finding an equitable resolution to this crushing dilemma will be, for the most part, impossible. So, just as with the side deals, regulatory palliatives will be unavailable (in this case due to the lack of an outside capital resource) and legal action will no doubt follow.
Capital Adequacy
The LTCI risk is, at best, partially understood. When combined with wholesale mismanagement and disregard for basic actuarial principles, it becomes toxic. The malfeasance that is SHIP's dominating legacy has become such a case in point.
The counterweight to such malfeasance is a minable capital resource. In its absence, policyholders are forced to feed on themselves in order to pay claims and effectuate equitable treatment. The Conseco Trust has, by and large, eliminated this capital resource counterweight and so engaged such a feed.
To fully understand the consequence of this point, it is helpful to recall that the final capital contribution Conseco will be making to SHIP is less than their required contribution just last year. And this is expected to last for the rest of time. Further, 70 percent of this "contribution" is in the form of a note payable by Conseco.
This is equivalent to a debt laden parent offering to guarantee the solvency of a parting offspring with little or no work prospects. Relations, as noted above, will soon dissolve into dispute.
AM Best Weighs In
AM Best is a cornerstone of the public's faith in insurers' ability to meet their obligations. Following are excerpts from Best's initial assessment of SHIP, offered in a November 20 press release:
- A.M. Best Co. has removed from "under review" and downgraded the financial strength rating to C (Weak) from C++ (Marginal) and issuer credit rating to "ccc+" from "b" of Senior Health Insurance Company of Pennsylvania to reflect its stand-alone status as part of a newly-formed independent trust.
- While SHIP's current absolute and risk-adjusted capitalization has improved due to the $175 million contribution from Conseco, Inc. ($50 million in cash), over 40 percent of statutory capital is subject to the credit risk of Conseco, Inc.
- A.M. Best believes that SHIP may require a combination of rate increases, reduced benefits and policyholder forfeitures to maintain sufficient capitalization over the long term. Additionally, as a private company, SHIP has no access to additional capital.
It is difficult to add to this assessment.
Disclosure
None of the information contained within this article is being disclosed to the 150,000 or so affected policyholders within SHIP. They will not be made aware of increasing policyholder inequities, the impact of planned future rate increase actions, their limited capital backing, or of Best's assessment. This is according to one state regulator who has read Conseco's draft letter to policyholders (it is still not public information) and pointedly acknowledged it as vacuous. In short, it states that a change of ownership has taken place and that the terms of policyholders' contracts have not changed.
It is difficult to believe that this will not be a very large problem as policyholders come to increasingly understand their position. The only ones that will survive this ordeal will be those that claim or die early, hardly a fiduciary stamp of approval to those who have given the most to keep the plan afloat.
Conclusion
The overriding theme that emerges with regard to SHIP and the Oversight Trust is difficult to miss. How it plays out will be a ghoul's delight. How it hurts 150,000 seniors will be considerably more sobering.
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Apart from the destruction of individual's security, the LTCI industry will take a hit. In the face of such a travesty as the Conseco Trust presents, it is difficult to gauge the basis under which it should be allowed to conduct future operations. Such basis will no doubt be a point of debate as other seniors fall victim to failing LTCI insurers' newly found claim disposal system.
Contact Martin McBirney at martinmcbirney@yahoo.com or phone 208-290-8846.