07 Jul Pennsylvania Court Approves the Liquidation of Two Insurance Companies
Penn Treaty Network Insurance and its subsidiary, American Network Insurance Co. received court approval for their liquidation petitions in March 2017. The announcement, made by insurance Commissioner Teresa Miller, stated that the Commonwealth Court in Pennsylvania included plans for policyholders to lodge claims with a state guaranty association system. Of course, all claims will have to adhere to the established statutory limits and conditions. It has taken the insurance companies 8 years to get the verdict, and during the proceedings, the court recognized the financial strains that the insurers were going through. The court decided that it was not possible for the insurer to fix their financial difficulties; and therefore, the consumers had to get the necessary protection.
The insurance companies had most of their business tied to long-term care insurance, which has not had a good run in the past several years. For one, the investment returns have been lower than projected, meaning insurers operate at a loss. There is also the insufficient pricing that most insurers have been dealing with. The cost of policies has been lower compared to the number of claims, which is usually higher than expected. Insurers have been operating on wrong assumptions about the number of people who would cash in on their benefits and those who would drop them. There have also been miscalculations on how much it costs to provide the benefits needed in long-term care. The insurance regulator explained that some companies have had to increase their policy rates to cope with the deficits while others have had to leave the market altogether.
Penn Treaty and American Network have a combined 76,000 policyholders with 9,000 of them hailing from Pennsylvania. Increasing premium rates is one option the two insurance firms could have tried, but the Pennsylvania Insurance Department decided that the rate increase necessary to counter the financial deficits would “severely harm policyholders” given that the insurer would need an average of 300% hike. In any case, insurance regulators would not agree to such an increase. For this reason, liquidation became the most viable solution for the insurers.
Continued Claims Payments
Commissioner Miller said in a statement that the state guaranty association system would keep on covering claims according to the law. She also clarified that the coverage limits and conditions of the state guaranty association system would apply to all claims. Policyholders can keep filing claims just as they have done in the past and they have to maintain their premium payments to qualify for the state guaranty association.
The Commissioner went further to explain that the reason for forming state guaranty associations was to ensure that state residents who were customers of an insolvent company received the necessary protection when it went out of business. Every state requires each insurance company with a state license to contribute to a guaranty fund, which is put into use when an insurer has to liquidate its assets. On its website, Penn Treaty informed customers outside of Pennsylvania that they would be able to make claims to the corresponding state guaranty associations.
Pennsylvania law requires policyholders in the state to receive payments for claims up to the maximum amount of the policy while considering the guaranty association limit of $300,000. In instances where a customer’s claim exceeds the guaranty association cap, the court and liquidator will decide if the remaining assets of the insolvent company will cover the difference. Data from actuarial models indicate that, in such cases, an average of 50% of customers has claims that exceed the cap set by the guaranty association in charge of their policies.
Projections indicate that the claims from policyholders of the two insurers will hit $4.6 billion. Guaranty associations are expected to cover about $3.3 billion with the customers paying for the remainder. The insurance department explained that the guaranty association responsible for the policies after liquidation might seek higher premiums. When a guaranty association decides to hike the rate of premiums, it has to stick to certain rules, depending on the state. The association may have to undergo a review process with regulators similar to the one subjected to companies that seek rate requests for long-term care insurance. An increase in premium rates will allow state guaranty associations to pay for a bigger portion of claims.
Grueling Court Battle
Penn Treaty is one of the companies that helped shape the long-term care insurance industry. Financial hardships started for the insurance and its affiliate when regulators realized that enterprises did not have the ability to cover their LTCI obligations to customers. In 2009, the Pennsylvania Commonwealth Court, gave permission to the then Insurance Commissioner, Joel Ario, to put the two insurers into rehabilitation. In 2012, they Pennsylvania Insurance Department went to court in a bid to turn the rehabilitation into liquidation. A state court ruled in favor of Penn Treaty, saying that liquidation would hurt policyholders. The court also voiced concerns that the insurance regulators were not completely forthright.
In 2015, a PA Supreme Court upheld the decision by the lower court for rehabilitation explaining that Penn Treaty and American Network were still bringing in revenues that would help pay out claims. The 2015 decision also considered the fact that state regulators took too long to request liquidation. Regulators asked for rehabilitation even though they had enough grounds to go for a liquidation petition. At the time, the ruling against liquidation of an insurance company was the first one in Pennsylvania. The 2017 ruling to liquidate came after the court decided that the financial hardships of the insurers were “too great to be remedied.” Penn Treaty and its affiliate have assets to the tune of $500 million, which are supposed to cover claims worth $4.6 billion.
Currently, the Life & Health Insurance Guaranty Association in Pennsylvania is responsible for Penn Treaty, which is not quite done yet. The insurer is not selling new policies, but it still has to keep a workforce that will be responsible for processing existing claims. Customers can get the necessary information about the liquidation and how it affects their policies from the company website. They can also receive information about how to make claims and keep paying premiums.