Friday, July 24, 2020

No. 383: Long-Term Care Insurance—An Alarming Development

The Request for Proposal
On July 8, 2020, the National Association of Insurance Commissioners (NAIC) issued a request for proposal (RFP) No. 2065 about "Long-Term Care (LTC) Insurance Restructuring." Here are the first two paragraphs (the ten-page RFP is in the complimentary package offered at the end of this post):
The National Association of Insurance Commissioners (NAIC) is soliciting proposals from law firms to research and report on existing state laws and regulations that could support a new regulatory framework authorizing insurers to separate policies from one another.
The chosen legal consultant will identify options for insurer restructuring or transfer of blocks of business to accomplish separation of policies from insurers' general accounts to avoid material cross-state rate subsidization and consider the potential risks to state guaranty funds, existing legal impediments, and other potential issues.
The LTC Task Force
The LTC Task Force (task force) of the NAIC is chaired by Commissioner Scott A. White of Virginia. When the task force was appointed, neither the Virginia Bureau of Insurance nor the NAIC answered my question about whether Virginia was selected because Genworth is based there. When I saw the RFP, I asked the Virginia Bureau for more details. A spokesperson referred me to the NAIC. The NAIC did not respond.

The task force has been operating partly in public and partly in secret. As I reported in No. 332 (September 12, 2019), the task force identified six "workstreams": (1) multistate rate review practices, (2) restructuring techniques, (3) reduced benefit options and consumer notices, (4) valuation of LTCI reserves, (5) non-actuarial valuations, and (6) data call design and oversight. I think the RFP discussed in this post grew out of one or both of the first two "workstreams."

Policy Transfers
I have written extensively about policy transfers from one insurance company to another in The Insurance Forum and later in this blog. My first article, of about 30 on the subject, was in the October 1989 issue of the Forum. When I circulated that article and one later article to each of the state insurance commissioners, many of them expressed keen interest. I described developments over the next quarter century in Chapter 23 of my 2015 book entitled The Insurance Forum: A Memoir. The three-page October 1989 article and the 15-page Chapter 23 are in the complimentary package offered at the end of this post.

The underlying issue is easily explained. In an insurance policy, which is a legal contract, the policyholder is the creditor and the insurance company is the debtor. A debtor cannot transfer its obligations under the contract to another party without the consent of the creditor. Such a transfer is called a "novation," which is the substitution of one debtor for another, and which cannot be accomplished without the creditor's consent.

General Observations
I am alarmed that the NAIC, through its RFP, may be thinking of taking steps that arguably would violate the constitutional rights of LTC insurance policyholders. The constitutionality issue is discussed in Chapter 23 of my Memoir. The RFP does not mention such an objective, but I fear they will try to avoid the need to obtain the consent of the policyholders. Should they try to do so, I think the NAIC and its legal consultant will face strenuous opposition.

Available Material
I am offering a complimentary 28-page PDF consisting of the RFP (10 pages), the October 1989 Forum article (3 pages), and Chapter 23 of my Memoir (15 pages). Email and ask for the July 2020 package about the NAIC's RFP.