The meaning of solvency?

We often hear this term in connection with the LTCI industry. It comes up in NAIC meeting minutes and we often hear solvency whispered to somehow suggest leniency in permitting rate increases. Is solvency an important factor in justifying LTCI rate increases for fear that if an insolvency were to occur, a state’s “Guaranty Fund” would be tapped and the whole world would come crashing down? This happened with Penn Treaty and the world seems to continue as is.

Penn Treaty is the largest known LTCI failure which had repercussions on other health insurers as the article points out. “Some health insurers, such as UnitedHealth and Aetna, have challenged the assessment process, arguing that long-term care is more like life insurance. Looking beyond Penn Treaty, Belth said, health insurers are concerned about other long-term care companies going under and saddling them with even more losses”. Carriers doing battle trying to decide whether LTCI is health or life insurance. Nice. When they figure it out, please alert all of us: regulators, legislators, and consumers of “all stripes” as the LTCI failure has seemed to poison the Health insurance pond.

In Penn Treaty’s case, the question of solvency pertained to the entire company as a single line company. PT was not in a position to compensate for LTCI losses with profits from some other line (health, life, P&C, annuities). However, a large multi-line company (call it “BIG”) should be able to offset LTCI losses from other lines, right? All their lines can’t all be doing so badly at the same time, could they?

So regulator concerns about solvency, do these pertain to: (a) the threat of LTCI taking down an entire company? (b) affecting only a company’s LTCI line or division only? or (c) is it an issue on a “per book-of-business” level? Can’t be (b) or (c) could it? (a) seems most likely.

It would seem that BIG(s) should be able to sustain losses in its LTCI line without tapping the policyholder for BIG’s LTCI mistakes. BIG(s) frequently made “financial stability” their closing LTCI argument some going so far as to brag about their score from rating agencies. Did these agencies rate according to (a), (b), or (c) above? As a practical matter, how could any rating agency drill down to the level of a “book of business”? Let’s stick with (a) for simplicity.

We have been told that the State Guaranty Funds kick-in only when the failure is at the company level. Seems (a) would get yet another vote based on logical consistency.

If BIG is a public company, where do its company shareholders fit in all of this? Aren’t they somehow on the hook for their company’s poor LTCI business decisions or is LTCI “cordoned off” (b, c)? Our vote again for (a).

Rather than to assume anything above, the most appropriate step would be to hear from those who are using this term most often. What does “solvency” refer to exactly? What are its true implications & effects, particularly on LTCI PHs. Otherwise, to simply throw the term around in blanket use is inappropriate especially when used to justify rate increases at the book-of-business (policy form) level.

Since the original post on this subject, we have learned officially that the answer is (a).

Author: Samuel Cuscovitch

Research scientist / strategist.

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