Major Long Term Care Insurance Company Declared Insolvent

Clients have heard me say many times that the long term care insurance industry is the canary struggling in the mine pointing to greater complications with the current health care system's reliance upon skilled nursing facilities to reduce more expensive  hospitalizations. Long-term-care insurance is designed  to shield families from crushing nursing home costs. But, the industry has reeled in recent years as health care policy encourages more, not less, institutional care for the elderly. 

Among the reasons consumers reject these policies is that the already expensive premiums are likely to increase. The increases are necessary, according to the industry, because claims made on the policies are increasing at unpredictably high rates, threatening the solvency of the policies.   Because the health care system encourages more, not less, long-term institutional care, the policies become economically unsound for both the insurance company and consumers Last year, the entire LTCI industry sold only about 100,000 policies, a stunningly low number at a time when more than 8,000 Americans turn 65 each day.  In 2000, Americans purchased 750,000 policies.  

Unexpected evidence that the industry may be faring even worse than previously imagined comes with the announcement that Penn Treaty of Allentown, Pennsylvania was recently ordered to liquidate and wind down its affairs, orphaning tens of thousands of policyholders. Big insurance companies rarely fail in the United States due to incentives created by state regulations encouraging healthy insurance companies to purchase an ailing insurer after which the troubled business simply vanishes  into the rescuer’s business. Policyholders may not even know what happened, or care, as long as claims are paid.  It is troubling that either Penn Treaty was so economically unsound that no buyer was interested, or that the industry is suffering so much that no other company or group of companies could rescue Penn Treaty.

According to the New York Times,  Penn Treaty’s failure may be a signal of more trouble to come in the long-term-care sector: 

“Liquidation is rare, but it does happen in bunches sometimes,” said Robert Hunter, director of insurance for the Consumer Federation of America. The organization has been warning about problems with long-term-care insurance since the early 1990s. In essence, companies underestimated the true cost of coverage and are struggling now to make good on all their promises.  “There is definitely talk in the street that it’s still a high-risk situation for quite a few companies,” he said. “It’s not a healthy situation.”

Each state has a  guarantee fund to rescue policyholders when an insurance company failures. The funds pay people’s claims, up to a predetermined limit that varies by state. The limit is $300,000 in Ohio, Florida, and Pennsylvania.  A few states cap guarantee-fund relief at $100,000. Others, like California and Connecticut, guarantee $500,000 and more. New Jersey is said to have no limit at all, but some analysts question that promise, especially if another big long-term-care insurer fails.  You can check every state's fund limit here.    

Regardless, in most states the fund only pays a claim to the reserve limit.  Many long term insurance policies have potential claims values two or three times that value.  If a policyholder experiences a loss in excess of the $300,000 limit, the policyholder has no recourse for the remainder of the insurance benefit the policyholder purchased.