Bayoneting the Wounded

We are just seeing the tip of the iceberg-- the direct consequences, the unintended consequences, the compounding consequences of the Wall Street meltdown and the era of lax regulation. On September 18, the day Lehman Bros. died, Conseco, the Indiana-based insurer lost its $100 million dollar investment in that investment bank. Conseco is also invested in AIG--at this point we don't know what impact the AIG debacle will have on Conseco. We do know that Conseco'a stock has been placed on the SEC's no-short list, and has retreated 40 percent to $4.78 since Sept. 18. Investors may be edgy because the company has seen hard times before for other reasons, having sought bankruptcy protection between 2002 and 2003.

This week, Conseco will again be in the spotlight for reasons having to do with its troubled insurance operations. Tuesday (September 30, 2008) will be a determinative day for Conseco's 149,000 long-term care insurance (LTC) policyholders, and virtually none of them know anything about it. It is the last day to comment on the company's proposal to the Pennsylvania Insurance Commissioner to spin-off of its long term care insurance business. The proposal calls for Conseco Senior Health Insurance Company (CSHIC) to divest itself of its long-term care policies by placing them in an independent trust, Senior Health Insurance of Pennsylvania (SHIP).

More long-term care policies are sold in California than any other state in the country. Bonnie Burns of California Health Advocates, a group protecting seniors on health, insurance and Medicare issues, filed her comments with the Pennsylvania Insurance Commissioner opening her letter with these words: "I am writing to you with alarm," and going on to say ": ..Conseco seeks to establish a new company, Senior Health Insurance of Pennsylvania (SHIP) and dump into it 149,000 of CSHIC's worst performing long-term care insurance policies, creating a virtual death spiral from which there will be no recovery, only a delay of the inevitable insolvency."

What Ms. Burns, and famed insurance professor Joseph Belth (Indiana University) are worried about is this: if Pennsylvania allows Conseco to dump its long-term care book of business, then every other long-term care insurance company in trouble -- and there are lots -- will want the same treatment by their regulators.

LTC insurance is in financial trouble and generally elderly policyholders have already absorbed dreadful premium increases of 60 percent or more in recent years. However, these financial wounds are nothing compared to the hurt that currently looms over them.

A brief history. Long-term care insurance was invented in the 1980's (kind of like credit default swaps invented in the 1990's). Originally, it was primarily designed for coverage of that final stay in the nursing home. The product has expanded with the times and changes in senior living. In its exuberance to sell its new product and carve out a significant market share, insurers ignored the scant actuarial data and experience available with which to price it. Prospective policyholders were known to be sensitive to price, and insurance marketers wanted a product that was less expensive than the competition's. Actuaries obliged them by relying on a game of poker in which they made liberal (and oftentimes unsupportable) estimates of the number of people who would allow their policies to lapse.

These policyholders, so the theory goes, would pay premiums for a few years thereby contributing to reserves but never filing a claim. It was essentially money for nothing-- pure gravy-- and high lapse rate assumptions were used to justify lower premiums. Nothing could possibly go wrong unless policyholders hung onto their policies come hell or high water. And they did.

Twenty years or so later, the chickens have come home to roost. The policyholders are filing claims. And, although long-term care insurance was sold as a product with level premiums-- in other words, your rates aren't going to go up-- because the rates are front loaded, policyholders in the last ten years have experienced 25, 50 and 100% rate increases.

The decision for regulators is complex. The Conseco long-term care business may already be headed for insolvency. Conseco has offered a capital infusion of $175 million as part of the spin-off package. But no one knows if Conseco can make good on their promise. The new "SHIP" as the company would be called, would have to sink or swim on its own-- that means for sure, more premium increases for Conseco policyholders. In the middle of the AIG/deregulation mess, there have been repeated calls for transparency. In his comments filed on September 25, Professor Belth has discussed a Conseco sponsored actuarial report that the Pennsylvania Insurance Department has not released, and Conseco has told Professor Belth is confidential. Transparency, what transparency? Professor Belth believes the report contains solvency projections for the Conseco long-term care unit and the stated need for five big successive rate increases!

And, as I said, the policyholders appear to be in the dark. Professor Belth points out that the Pennsylvania Department has issued no press release, nor sent any direct communications to policyholders. He cites to the fact that two Florida policyholders sent letters of inquiry having heard about the transaction "by accident."

So, what's a regulator to do? What is best for the policyholders? Prof. Belth opined that if the Pennsylvania Department puts the company into insolvency immediately-- which he says is inevitable-- then there is a chance to rehabilitate it or sell the company. If the Pennsylvania commissioner approves the trust Prof. Belth believes the inevitable collapse will be delayed compounding the damage and resulting in liquidation--a very bad option for Conseco policyholders. Word is, likely approval by the Pennsylvania Commissioner.

Perhaps instead of calling the new trust entity SHIP, it should be named the Senior Health Insurance Trust. You figure out the initials.

Comments

[Joy2k]

I think the big problem is Fannie/Freddie and ACORN -it is being reported by all sides now, that ACORN used intimidation tactics to get banks to loan really poor people money to buy homes. Money they were incapable of paying back.

Back to Conseco and their precedent setting attempt to throw our seniors under the bus-there is more info on this mess at www.savemyltc.com.

The Parallel Between the $700 Billion Bailout and The Conseco Trust

Treasury Plan Conseco Trust

Basic Plan Move bad loans off the books Move bad policies off the books
Why? Lenders and regulators screwed up Insurers and regulators screwed up
Who wins Wall St. Executives Conseco Executives
Who Loses U.S. Taxpayers Conseco Policyholders
Failure Cost Borne by Taxpayers Borne by Policyholders
Done Before? No No
The future? Similar disasters will seek shelter Similar disasters will seek shelter
A Voice? Handful of Congressmen Frank N. Darras

[Joy2k]

To me, this is a re-enactment of what disability insurers have been doing to the disabled.

Long Term Care is the next group of over sold, underpriced policies to bring down the bottom line of a big company. Suddenly, Conseco is realizing people are living longer? Come On!!

Conseco cannot afford to provide what they sold when they cut prices, promised the moon--too bad. So they cheat and destroy the lives of our weakest members (and our heroes who fought in WWII and Korea).

First of all--they knew people are living longer and when they started to lose money, they just change their business model to cheat our seniors.

Why is the Insurance Commissioner, who lambasted Conseco, now helping them rush to this Trust?

That is the billion dollar question.

[Henry]

There is only one solution to this growing problem. Social healthcare. Get rid of all, all the insurance companies with respect to this. When health is concerned the business person involved with insurance has a conflict of interest.(wellbeing of patient vis-a-vis bottom line) Add to tht it is amazingly inefficient.

[Egalitare]

When I first heard of long term care insurance back when I was in the labor negotiations game, I knew it was going to be a bad ending. Long term care is a good idea, but this was only going to be useful for those in the top 25% of income, those who MIGHT be able to pay the premiums for a couple dozen years then presumably have "peace of mind" when they could no longer live without assistance.

Long term care needs to be incorporated in the existing SSI/Medicare structure. There are people who can live to the end of their days in their own homes or apartments with little additional help. Most of us can live outside of institutions with some monitoring or scheduled assistance. An aging population need not be a "drain" on us if we collectively attack this in the best interests of individuals AND the greater society.

[knowBuddhaU]

So they pretended that enough people wouldn't use their product in order to justify artificially low prices? And then people actually did use the product they bought, who could've foreseen that?

I've read that Bush called on and aggressively encouraged banks to lend to first-time homebuyers. It looks to me, your average voter with almost no understanding of finance, like an economic hit job. We got sold on overpriced infrastructure, saddled with unforgivable debt, as a matter of Bush admin policy, and now comes payoff time for the bandits involved. Are the bloated bonuses akin to kickbacks? "Do the wrong thing, sign this hydroelectric deal, and we'll take care of you and your family," or words to that effect, surely swayed a dictator or two.

Isn't that how we ruined the economies of the developing world?

Has there been a similar effort, to "pump and dump" insurance policies, from the Bush Admin? Is that in effect what Conseco is trying? 'Sell policies, but never service them' -- is that their ploy?