Decision not to liquidate LTC insurer could leave policyholders up the creek

After three years of legal battles, a judge in Pennsylvania has barred state insurance regulators from liquidating troubled long-term-care insurer Penn Treaty. The end effect on policyholders, however, could be ugly.
In a May 3 decision, Commonwealth Court Judge Mary Hannah Leavitt denied a request by the Keystone State’s insurance regulator to Penn Treaty Network America Insurance Co. and its sister company, American Network Insurance Co., into liquidation.
The two insurers originally were placed under rehabilitation in January 2009 by then-insurance commissioner Joel Ario, who petitioned the Commonwealth Court in October of that year to liquidate the carriers. Regulators found that the carriers’ largest blocks of business, which were written prior to 2002, had inadequate premium rates. Mr. Ario’s office deemed that the companies couldn’t pay future claims without significant rate increases.
The regulator’s request to liquidate the two insurers in 2009 kicked off a nearly three-year battle between Pennsylvania’s insurance department and the two companies. In the end, Ms. Leavitt denied the liquidation, saying that the insurance commissioner had denied the rate increases the companies needed and “acted to frustrate rehabilitation.”
Judge Leavitt’s order requires the state to develop a rehabilitation plan for the companies within 90 days and also requires that the plan “eliminate the inadequate and unfairly discriminatory premium rates” for pre-2002 business.
Through the rehabilitation, Penn Treaty and American Network have been paying their claims in a timely manner and have not had to liquidate assets to do so, according to court documents. The insurers have about 104,000 policies in force as of April 30, according to the Pennsylvania Insurance Department. Of that amount, about 85,000 were written before 2002.
The insurance commissioner’s office, which is now run by Michael F. Consedine, is looking at options for challenging the court’s decision, said Rosanne Placey, a spokeswoman for the office.
What happens to the policyholders is still to be determined. Actuarial experts for Penn Treaty and American Network had determined that the companies need to raise rates by an aggregate 300% to remain solvent, according to court documents. Such increases would be spread out over a period of many years. For instance, one scenario in that plan would involve premiums by 40% initially in one year, and following that with subsequent, smaller increases of about 10% until 2024.
Still, the prospect of large rate hikes doesn’t sit well with the insurance department. “Here we are with a book of business that’s older and with people of presumably lesser means,” Ms. Placey said. “How would they absorb these rate increases?”
“While we all are sympathetic to keeping insurance rates down, by the same token, people shouldn’t expect something for nothing,” said Gary Hindes, chairman of The Delaware Bay Co. LLC and Penn Treaty shareholder. “Just as State Farm cannot be expected to insure peoples’ cars at rates that will drive them out of business, long-term care insurance providers such as Penn Treaty shouldn’t have to provide coverage at rates which will drive them into insolvency. As the saying goes, there’s no such thing as a free lunch.”
Liquidation wouldn’t necessarily be the easiest route for policyholders. The customers would have their policies cancelled within 30 days, and state guaranty funds would step in to provide some replacement coverage. Those funds, however, would be under a cap limiting benefits; that cap varies from state to state.
Rehabilitation of the insurers, however, could include some combination of rate increases and benefit modifications.
Eugene Woznicki, chairman of the board at parent company Penn Treaty American Corp., noted that policy changes could help mitigate the negative effect of rate increases on customers. “We could look at policies and find benefits they don’t need,” he said. “There are lifetime plans, and a policyholder may want to move to a five-year plan. Most times, insurers are sensitive to these issues.”
The future of the case is still up in the air, but insurance industry experts say steep rate increases are likely.
“Based on Judge Leavitt’s decision, if the department succumbs to the ordered rehabilitation, there will be rate increases in Pennsylvania and possibly other states for policyholders — there could be significant rate increases,” said Steven B. Davis, a partner at Stradley Ronon Stevens & Young LLP who has done work for the Pennsylvania insurance department. “It’s not likely a win for the policyholders.”