Pennsylvania’s Insurance Department has set the ball rolling in
what will be the biggest failure in the US life and health
insurance industry in five years. Despite this, the industry’s
record remains excellent, particularly when compared with the US
banking industry which is facing an avalanche of failures.
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Setting the stage for the US life and health insurance industry’s
biggest failure in five years, the Pennsylvania Insurance
Department (PID) filed court petitions on 2 October seeking orders
of liquidation for Penn Treaty Network America Insurance Company
(PTA) and its subsidiary, American Network Insurance Company.
PTA, a long-term care insurer founded 35 years ago, has some
120,000 policyholders in all 50 states and the District of
Columbia. In 2008, the company reported total gross premium income
of $8.2 million and investment and other income of $5.3
million.
Based on total administered assets of $1.13 billion at the end of
2008, PTA ranked as the 128th-largest life and health insurer in
the US according to rating agency AM Best Co.
The PID’s move follows a period of nine months during which PTA has
been under the direct control of the PID, which was granted an
Order of Rehabilitation by a Pennsylvania court on 8 January
2009.
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By GlobalDataCommenting on its petition to have PTA liquidated, the PID’s
insurance commissioner Joel Ario said: “Our comprehensive,
independent evaluation has determined that the companies do not
have the ability to pay future claims without significant rate
increases that would have to be requested and approved in all 50
states. In the current circumstances, those rate increases simply
would not be fair to policyholders.”
Ario added that unless requested by a policyholder, long-term care
policies will not be cancelled and will be transitioned to the
states’ guaranty fund administered by the Pennsylvania Life &
Health Insurance Guaranty Association.
A growing list
PTA joins three other life and health insurers placed into
liquidation by state regulators since 2008. These are Texas-based
Lincoln Memorial Life Insurance and Memorial Service Life Insurance
in 2008 and Indiana-based Medical Savings Insurance Company in
2009.
Providing policyholders protection in the event of an insurer
failing, each of the 50 states, the District of Columbia and Puerto
Rico has a guaranty association (GA) which co-ordinates consumer
protection in insolvencies involving multiple states through the
National Organization of Life and Health Insurance Guaranty
Associations (NOLHGA). NOLHGA was established in 1983.
Though protection offered to consumers varies slightly from state
to state all consumer-oriented life and annuity contracts
guaranteed by a life insurance company are covered by GAs are
subject to coverage limits specified by the National Association of
Insurance Commissioners’ Model Act. These are:
• Life insurance death benefits up to $300,000 and cash values to
$100,000;
• Annuities guaranteed by the insurer (fixed annuities and
guaranties attached to certain variable annuities) up to $250,000;
and
• Health benefits, depending on the type of contract, to between
$100,000 and $500,000.
Stages to liquidation
In the US liquidation of an insurer only follows intervention by
regulators under which the insurer is placed into receivership
aimed at financial rehabilitation. According to the NOLHGA, in the
first intervention phase, generally termed conservation, the
insurance commissioner, as conservator, maintains the status quo
relating to, for example, custody of records and assets while
determining the seriousness of the insurer’s problems.
If the commissioner is satisfied that any significant problems have
been addressed, the company can be released from
conservation.
If this does not occur the insurer may be placed into liquidation
or proceed to a rehabilitation phase in which the commissioner, as
rehabilitator, is vested with title to the company’s assets and
control of company operations.
The objective, if possible, is to develop a court-approved plan of
rehabilitation intended to address the problems that made the
receivership necessary. The outcome may be the insurer’s release
from rehabilitation or a decision to proceed with its
liquidation.
In the latter case the commissioner, as liquidator, is charged with
responsibility for marshalling the insurer’s assets, evaluating
claims of policyholders and other creditors and distributing the
assets to approved claimants.
Over the past 22 years NOLHGA has been involved in 74 insolvencies
in which a total of $5.2 billion was paid by GA’s to fulfil failed
insurers’ obligations.
The failure rate among life and health insurers pales into
insignificance when compared with the US banking industry, where
bank regulator the Federal Deposit Insurance Corporation (FDIC)
reports that in the first nine months of 2009 alone it has closed
94 failed banks. This reduced the FDIC’s failure insurance fund
from $45 billion at the start of 2009 to $10.4 billion. The FDIC
insures each bank account at a failed bank up to $250,000.
NOLHGA estimates the total resources available to GAs at about $4.7
billion to cover life and annuity business and $4.1 billion to
cover health insurance business.
