On October 27, the NAIC Model Law (E) Working Group released an exposure draft of its proposed revisions to the Life and Health Guaranty Association Model Act (#520), intended to address the financial challenges of Long Term Care (“LTC”) insurance insolvencies, such as this year’s Penn Treaty liquidation, and to bring health maintenance organizations (“HMOs”) within the Guaranty Associations’ protection and assessment base. The Working Group is chaired by James Kennedy of the Texas Department of Insurance. The proposed revisions are the product of an intense effort by a drafting group that was formed in July. With a 30 day exposure period, comments by interested parties are due by November 27, 2017.
The two major changes proposed in the exposure draft include the following:
- Requiring HMOs to become members of the various state life and health Guaranty Associations where they do business, thus adding them to the assessment base, and extending Guaranty Association coverage to their enrollees;
- Specifying precisely how to allocate Class B Guaranty Association assessments relating to impaired or insolvent LTC insurers to the existing two assessment accounts, which are (1) the Life and Annuity Account (the “L&A Account”) and the (2) Health Account, which if the revisions are enacted will include HMOs. (See Section 6 of the Model Act, creating the two accounts.)
The core problem the Working Group is attempting to address is that the LTC market is simply not large enough on its own to bear the financial burden of Guaranty Association coverage for any significant LTC insolvency, so for the traditional Guaranty Association system to be viable for this challenged line, a broader premium base for Guaranty Association assessments must be established. To provide some measure of the magnitude of the Guaranty Associations’ LTC burden, publicly-available 2017 actuarial estimates show the total the State Guaranty Association system’s anticipated covered liabilities for the Penn Treaty insolvency to exceed $ 2.5 Billion on a discounted basis, and, non-discounted, over $ 4 Billion. To further complicate the situation, although many LTC policy premiums are reported as health insurance premiums and thus under the traditional assessment approach health insurers would bear the lion’s share of the related Guaranty Association LTC assessment burden, even though few health insurers have actually any written LTC insurance. LTC coverage has generally been written by life insurance companies, often as a rider on a life insurance product. Together, these circumstances create a serious issue about the equity of using the traditional assessment practice in LTC insolvencies. The proposed revisions represent a departure from that traditional approach in order to establish a broad assessment base.
In an attempt to satisfy the daunting financial burden of current and potential future LTC insolvencies, certain insurance trade associations and other representatives of key stakeholders participating in the Working Group process reached an agreement that Guaranty Association assessments for LTC impairments and insolvencies should be split 50-50% between the life insurer members on the one hand, and the health insurer members on the other, which would include HMOs. Thus, the crux of the proposed changes are in the assessment provisions.
The details of the proposed changes in the Model Act’s assessment provision are found in Section 8. Only a minor change is proposed in the “Class A” assessments for administrative expenses and legal costs. Class A assessments can be made by the Guaranty Association’s Board of Directors on a pro rata or non-pro rata basis, as needed. The current $300 limit per member on non-pro rata Class A assessments is removed to provide the Board more flexibility in funding such expenses. (A number of states have apparently already deleted this limit from their Life and Health Guaranty Association Acts.)
Class B assessments are the central focus of the Working Group’s proposed revisions. Class B assessments are those “authorized and called to the extent necessary to carry out the powers and duties of the Association . . . with regard to an impaired or insolvent insurer.” (§ 9.B.(2).) In LTC insolvencies, a Guaranty Association’s powers and duties will likely require the Guaranty Association provide ongoing coverage and ultimately pay policyholder benefits in the future. Generally, Class B assessments for a particular impaired or insolvent insurer traditionally have been allocated between the accounts “based upon premium or reserves of the impaired or insolvent insurer or any other standard deemed by the board in its sole discretion as fair and reasonable under the circumstances,” a process left unchanged in the exposure draft for other covered lines. (§ 9.C.(2)(a).) In contrast, for an impaired or insolvent LTC insurer, the exposure draft provides that any related assessment “shall be allocated according to a formula included in the [Guaranty Association’s] Plan of Operation and approved by the Commissioner. The methodology shall provide for 50% of the assessment to be allocated to accident and health members and 50% to be allocated to life and annuity members.” (§ 9.C(2)(b)) (emphasis added). Further, because of potential “cross-over” participation by both life insurers and health insurers in each of the two accounts created by Section 6 of the Model Act, a new proposed drafting note includes a mathematical formula that factors in the member’s double account participation and makes adjustments to achieve with precision the contemplated 50-50% split between the two categories of members. The explanatory materials accompanying the proposed revisions make clear that this formula is part of the methodology to be incorporated into the Guaranty Association’s Plan of Operation. (These Plans of Operation are generally subject to the Commissioner’s approval. (See § 10 of the Model Act).)
Given that it may be necessary for Guaranty Associations to continue, reissue or replace inadequately-priced LTC policies, the drafting group added language emphasizing and confirming the Association’s authority to modify rates in providing continuing coverage, unless prohibited by state law. For example, in providing substitute coverage as required under Section 8.C., the Association may use “actuarially justified rates, [subject to prior approval of the commissioner];” (§8.B.(2)(d)(1)). Further, an additional proposed addition to Section 8 specifically focuses on rate increases, as a new Section 8.K.(9) states: “Unless prohibited by law, in accordance with the terms and conditions of the policy or contract, file for actuarially justified rate or premium increase for any policy or contract for which it provides coverage under this Act;…” Proposed revisions to the drafting notes to Section 8 include the following new statements:
- With respect to Section 8.B., “This subsection also details that any rate changes, including rates for new or replacement contracts or policies, must be actuarially justified and the commissioner must approve the rates prior to the rates becoming effective.”
- With respect to the proposed Section 8.L.(9), the new subsection “was added to clarify that the Association has the authority to request rate increases … in accordance with the terms of the policies or contracts, unless prohibited by law. States should determine whether it would be consistent with other provisions of State Law to make this power of the Association subject to the prior approval of the commissioner….” The drafting note continues to reference any state adoption of the NAIC Model Act and Regulations related to LTC insurance as an additional consideration and point of conformity.
Many of the other changes are technical or address changes in terminology to accommodate HMOs as members. For example, a new defined term, “Health Benefit Plan,” has been added to help define the scope of coverage to include HMO subscriber contracts, and to define some important exclusions. (§5.J.) Another such revision suggests increasing the Guaranty Association’s maximum Board size by two directors, in order to accommodate representatives of new HMO members. (§7.) Medicaid is excluded for Guaranty Association coverage, following the current exclusion of Medicare. (§ 3.B.2). The Working Group considered that several states, including Illinois, currently provide Guaranty Association coverage for HMOs, in Illinois’ case in a separate Guaranty Association. See 215 ILCS §125/6-1 et seq.
Finally, the NAIC web site for the Working Group has many documents that provide further background on these and other issues addressed in the exposure draft. The Reinsurance and Insolvency (E) Task Force will receive a Working Group Report during its November 15 Conference Call.