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A Matter of Trust
The trust will pay claims from a pool of funds transferred to it from Conseco, including $175 million in capital. But A.M. Best Co., the insurance–rating firm, warns that the trust may need to raise rates and reduce benefits and has no access to additional capital. If the trust were to become insolvent, some policyholders might ultimately have to rely on the Pennsylvania state guaranty association to pay any claims, up to limits set by state laws, other experts said.
More than 140,000 owners of Conseco Senior Health Insurance Co. long–term–care policies across the U.S. are affected by the plan, which was worked out with Pennsylvania regulators. Conseco Inc. is headquartered in Carmel, Ind., but its Senior Health long–term care unit was based in Pennsylvania, making it subject to that state’s regulators. The unit stopped selling new policies in 2003.
Pennsylvania Insurance Commissioner Joel Ario defended the transfer, saying in a written statement, "There were no good choices here, only bad ones and worse ones." Mr. Ario said Conseco already had plowed more than $900 million into Conseco Senior Health Insurance, and its corporate board had made it clear no more money was coming. "The likely result would have been either substantial rate increases or insolvency," he said.
Frank Darras, an Ontario, Calif., attorney who represents policy owners in disputes with insurers, calls the Conseco spinoff "unfounded, unfair and unprecedented. This company took the premiums and promised them independent living in their golden years, and they have kicked them to the curb. The trust can’t survive. It is on the ventilator right now."
Conseco disagrees. In a statement issued Nov. 12, when the transfer into the trust was concluded, Chief Executive Jim Prieur said: "The completion of this transfer and the formation of the independent trust is a balanced solution for all of Conseco’s constituents and Senior Health’s long–term–care policyholders."
Critics say the deal may set a precedent for other financially troubled insurance companies to set adrift long–term policies.
Policyholders and their children are concerned. Kitty Spillman of Raleigh, N.C., says her 86–year–old mother, Thelma Brewer, relies on a Conseco policy for her assisted–living expenses. The policy was expected to pay lifetime benefits. If she outlived her benefits, it might force her mother to pay for continuing care out of her own funds, depleting her estate.
"I am worried they will run out of money," says Ms. Spillman, who is her mother’s guardian. She says she hadn’t received any notice from Conseco about the transfer of the policies to the trust. Mr. Ario, the insurance commissioner, says the trust had begun mailing notices to policyholders during the third week in November.
Long–term–care policies help defray nursing–home or assisted–living costs. About eight million Americans now own one. Most of the policies are purchased by people in their 50s and 60s for protection against claims that may not occur for decades. In 2007, the average policy buyer was 58 years old and paid $1,950 for a long–term care policy in the first year of coverage, says Jesse Slome, a spokesman for the American Association for Long Term Care Insurance, a trade group.
Early versions of long–term–care insurance policies were introduced in the 1970s, and by the early 1990s more than 100 companies were offering them, according to Limra International, a research group. But some of the insurers’ assumptions turned out to be wrong, leaving policies underpriced and a drag on their finances. Early purchasers lived longer, generated higher medical expenses and terminated fewer policies than insurers anticipated. As a result, some insurers have had to raise premiums many times on policies that were supposed to be stable in price.
In 2000, the National Association of Insurance Commissioners issued new rules for long–term–care policies to address some of these problems. Insurers have also limited benefits, tightened eligibility and underwriting requirements, and raised premiums on newer policies. But many of the older policies remain in force.
The Conseco action comes at a time of growing concerns about whether many long–term–care policies will pay off when needed, or will require drastic premium increases. Now, the industry’s underpricing woes are being exacerbated by the financial crisis. Insurance–company investments have done poorly, and in some instances the insurers are having trouble raising more capital to meet the reserve and capital demands of state regulators. Other big players in the long–term–care industry include Genworth Financial Inc., Manulife Financial Corp. and MetLife Inc.
Industry experts contend that most life–insurance companies remain sound and that state guaranty associations can make good on policies up to certain limits in the event of insolvencies. Long–term–care policies are guaranteed up to a limit of at least $100,000 in every state, according to Peter Gallanis of the National Organization for Life and Health Insurance Guaranty Associations in Herndon, Va. In one–third of states, limits are up to $300,000; and in another third, up to $500,000.
Still, new buyers of long–term–care policies should take particular care in picking out a financially stable insurer, perhaps examining its financial statements as well as its ratings, and check as well into its record of premium increases.
How Conseco policyholders will fare in the trust is a matter of debate. Mr. Darras, the plaintiff’s attorney, estimates that former Conseco policy owners would have to pay at least $2,083 more in premiums over the next five years under the new trust, a problem for owners whose average age is 80. The Pennsylvania insurance department wasn’t specific, saying only that some rate increases are likely to be necessary to avoid insolvency based on current information and projections. Rate increases must be approved by the individual states.
Julie Freeman, 73 years old, of Tequesta, Fla., who received notice last week of the transfer, says she is worried that the Conseco policies for which she and her husband paid more than $45,000 in premiums over 20 years won’t pay out now that he may need nursing care. Her husband, Robert, 83, suffers from cancer and deterioration of the spine that may soon confine him to a wheelchair, and they live on the second floor.
"My fear now is that if … Conseco won’t be making good on its claims in the next year or so, I will have to spend down our assets [to qualify for Medicaid] and then I will have nothing to live on in my old age," says Ms. Freeman.