When fee-only financial adviser Martha Schilling discovered that an elderly client needed to augment an old long-term-care insurance policy, she was shocked to find that the client's carrier is teetering on the brink of insolvency.
When fee-only financial adviser Martha Schilling discovered that an elderly client needed to augment an old long-term-care insurance policy, she was shocked to find that the client's carrier is teetering on the brink of insolvency.
The client, a 77-year-old widow whom Ms. Schilling declined to identify, is one of more than 120,000 insured individuals who own a LTC policy with Penn Treaty Network America Insurance Co., which is awaiting a court decision on its liquidation.
“Everything has been a mess,” said Ms. Schilling, an adviser at Schilling Group Advisors in Dresher, Pa. “We haven't heard anything from the state on this, and now it's a matter of waiting for the results of the company's [liquidation hearing] before they can issue anything from the state guaranty funds.”
Veterans of the LTC industry, Penn Treaty and its subsidiary American Network Insurance Co. had about $245 million of annualized premiums in force as of Sept. 30.
The companies' glory days as major LTC providers are nearing a cacophonous end.
After seizing the companies in January for a rehabilitation program, Pennsylvania Insurance Commissioner Joel Ario and his staff learned that both were in worse shape than expected. If both companies had appropriate reserves for future claims and risks, Penn Treaty's statutory capital and surplus would have been in the red by more than $1.3 billion as of June 30, and American Network's would have been negative by more than $45 million.
But the commissioner isn't the only one waiting for a Pennsylvania court's decision on the liquidation. Policyholders won't receive notice of any liquidation until it is official.
The companies' troubles are a symptom of the liberal underwriting standards and inappropriate pricing that were common during the early days of the LTC insurance industry in the 1980s and 1990s, analysts said. These same factors plagued Conseco Inc.'s LTC subsidiary, Conseco Senior Health Insurance Co., which has been separated from the insurer and put into an independent trust.
And as insurers' problems come home to roost, advisers are dealing with older clients who may have thought they were getting a good deal on LTC insurance years ago but are now scrambling for alternative plans and learning about insurer insolvency the hard way.
NAIC TASK FORCE
The National Association of Insurance Commissioners has taken notice of such issues, and it recently established an LTC task force that will examine how regulators should handle the transfer of closed blocks of business and contend with insurers' “death spirals,” which occur when an insurance plan's costs skyrocket as high-risk policyholders outnumber low-risk insured individuals. Christina Urias, Arizona's insurance director, is chairwoman of that task force.
Meanwhile, advisers and clients affected by Penn Treaty's liquidation are searching for a Plan B.
Enter Ms. Schilling and her elderly client, who was trying to get her finances in order just a couple of months after her husband's death.
On the surface, the client's 10-year-old policy required supplementation because it covered only $90 a day in benefits and lacked an inflation rider. The insurance agent who originally sold the policy wasn't in touch with the client to address the coverage shortfall or the problems brewing at Penn Treaty.
A reporter's query on the carrier via the National Association of Personal Financial Advisors had alerted Ms. Schilling to the problems at hand and prompted her to reach out to colleagues in the insurance brokerage world.
Because the company has policyholders in all states, the brokers floated along information on the different levels of coverage that state guaranty funds would provide once the liquidation were official — a key piece of information for her because her client is in Pompton Plains, N.J.
Advisers who don't specialize in insurance are often at a loss when an LTC carrier implodes.
“Lots of broker-dealer reps are well-versed in investments, but not so much in insurance,” said Michael Chamberlain, principal of Chamberlain Financial Planning LLC. “Also, a non-licensed person giving advice on an insurance policy could violate state insurance laws.”
Mr. Chamberlain recently took on a new client with a Penn Treaty LTC policy. That client is lucky in a way: He is eligible for Medi-Cal, California's Medicaid program.
Further complicating the matter, insurer ratings have become less accessible, as some firms drop coverage once a regulator seizes a company.
A.M. Best Co. Inc. ends its coverage of a company and ceases contact with the insurer once a state regulator has taken control, giving that insurer a grade of E.
Still, if a regulator manages to sell old blocks of business to other companies, there can be a ratings effect on insurers that acquire and service the blocks of business.
Highly rated companies tend to snap up strong blocks but shun poorly written blocks out of fear of downgrades.
“Say you buy a block of business that we view as less creditworthy than the current business. It may result in a negative rating action if it's a material part of the company going forward,” said Andrew Edelsberg, a vice president of the life and health division at A.M. Best.
Even if guaranty associations end up with blocks of LTC business during liquidation, insured individuals may still end up paying more in premiums if underpricing is a major part of an insurer's failure, said Sean McKenna, a spokesman for the National Organization of Life and Health Insurance Guaranty Associations.
As Penn Treaty's fate continues to unfold in the Pennsylvania courts, Ms. Schilling and her elderly client are still trying to reach a decision on how to proceed.
Even though New Jersey's guaranty fund provides unlimited coverage for long-term care, the client still needs another policy.
“I still want her to get an additional policy if she's amenable, but you can't believe how upset she is, because she's never had to deal with anything like this,” Ms. Schilling said.
E-mail Darla Mercado at dmercado@investmentnews.com.
