Last month, Pennsylvania Insurance Commissioner Joel Ario indicated in an interview that he might consider placing the older policies of troubled long term care insurer Penn Treaty into the Senior Health Care Oversight Trust (the Trust), the state sponsored entity that oversees the block of long term care insurance (LTCI) policies recently divested by Conseco, Inc. This would bring the total number of LTCI policies overseen by the trust to around 250,000, roughly equal to 5% of all LTCI policies in-force in this country. The Commissioner's first hope is to place Penn Treaty's policies with another insurer or return the company to solvency, but with one deadline already passed, it must be assumed that his hopes may not be realized.In the meantime, the first indication of the future outlook for the Senior Health Care Insurance Company of Pennsylvania (SHIP), the renamed insurer holding the divested Conseco policies, has come to light in a series of rate increase requests for several policy forms it holds. An analysis of these requests coupled with the initial response to the requests by several states further places into question the long term viability of SHIP and raises the distinct possibility that the company is headed into insolvency considerably faster than previously assumed.
Pennsylvania's approval of the Trust was based, in part, on an analysis of the subject policies by Milliman USA, a highly respected actuarial consulting firm with an expertise in the area of LTCI. While the Milliman report is not public, the Pennsylvania Department of Insurance (PA DOI) has disclosed Milliman's conclusion that SHIP's long term solvency would require five rate increases into the future. Based on Conseco's history with rate increase requests on this block over the past couple of years, there was reason to believe that such increases would not come for a while and that they would be in the range of 15%. That assumption, it is turning out, looks to be terribly flawed.
The Trouble with Rate Increases
During the years leading up to the divestiture of the policies now held in SHIP, Conseco was unable to get the rate increases necessary to help make the block solvent. This is because state regulators believed policyholders had been punished enough by Conseco's mismanagement and that they, Conseco, should make up more of the shortfall. As a result, Conseco was forced to contribute $100 million a year over the last nine years to adequately reserve for future claims, most of that in the last three to four years. This continued capital drain, alongside recognition that various policy provisions currently being triggered are notably weakening the potential for future revenue, is what led to senior management's decision to remove the block of policies from the company's books.
Now, less than three months after SHIP set sail the first salvo from the first of five projected rate increase requests has been "fired", a shot across the bow as it were. It covers four groups of related policies and each request is for 40%. And yet, while the level of the increase request itself is surprising, it is the faint consequence for the future of the subject policies that is most stunning. In every case, the requested increase does little or nothing to bring the policies back to solvency.
The contractual form on which these policies are written is known as Guaranteed Renewable. This form allows an insurer to increase rates on all active, paying policyholders (a significant distinction in this block) if aggregate lifetime losses are projected to exceed 60% of premiums collected; put simply, an insurer can raise rates if they expect to pay out more than 60 cents on the dollar of premium. This measure is known as the statutory lifetime loss ratio and it is the negligible improvement the requested increase would make in it that foreshadows the future of these policies.
Typical of the forms for which SHIP has requested an increase is the LTC-3, originally written by American Travelers Life Insurance Company. The projected lifetime loss ratio for this block of policies prior to the rate increase request is 103%, 43 points worse than the 60% statutory standard. Staggeringly, the requested 40% increase is only projected to reduce this 103% to between 98% and 95%, around 15% of the difference between its current level and what is considered "break even" for LTCI. The introductory paragraph to the actuarial memorandum that supports the request drives home this point with the near comical observation that SHIP "is likely to file for future premium rate increases on this form."
What this means is that, even if all five projected rate increases were at 40%, the total losses would still leave the block below water. And to understand the strength of this point, it should be noted that five rate increases of 40% in combination with prior increases would put rates, on average, at around ten times their original level. An annual premium of $20,000 would likely be typical for those able to hold on.
Adding to the agony of this situation, the early response by some states in the face of SHIP's request has been less than accommodative. Initial polling suggests that the requested increases will not be granted in full. Idaho, when asked for 40%, granted a 10% increase. Oregon gave the company 0%, nothing. If this is any indication of how the states are responding, the picture regrettably becomes ever bleaker.
The reason for this is that, while policyholders are protected in the near term from punishing rate increases, funds to pay claimants are starved and the meager capital resources of SHIP are quickly drawn down. And since SHIP has no outside capital resource to contribute the difference (it is an independent insurance company held by a non-profit trust) as it did with Conseco, insolvency will be the result. And what is surprising is how much sooner this may take place than was ever anticipated.
The Need for Transparency
Sadly, there is no good solution to the dilemma presented by SHIP, due largely to the fundamental nature of LTCI. As a consequence of LTCI's premium structure and the concentration of claims toward the end of life, a large majority of the lifetime premiums are collected before any significant portion of the lifetime claims are paid. Once a block of policies has been on the books as long as those in SHIP, 10 to 15 years on average, there is little opportunity to recover from grossly inadequate initial rates as the bulk of the lifetime premiums have already been collected. The remaining premium stream, even with large increases, simply does not have the capacity to make up for the years of insufficient premiums.
This will force some painful decisions once the company becomes insolvent. There will be many affected parties, including the policyholders, creditors, the states and other long term care insurers that will be assessed to make up shortfalls. Balancing the needs of all these parties will be difficult indeed, particularly in today's financial environment. However, there is one option today that would at least allow those involved to understand the extent of the problem and prepare for its consequences. And that is the release of the Milliman report.
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Release of the report, on the other hand, would allow everyone involved to understand what the future holds for SHIP and how it can be expected to play out. This, in turn, would allow state regulators to develop a framework for an orderly liquidation of the company's policies. Policyholders would have the opportunity to at least get an estimate of how bad the situation is likely to become and make plans whether or not to hold on to their coverage and at what level.
Too often situations like this play out in crisis mode, significantly increasing the damage that would otherwise result from a more orderly approach. The state of Pennsylvania should release the Milliman report so that such an orderly approach can begin.