GE's long-term care insurance woes have highlighted broader questions about reserve adequacy for business that, in many cases, was written decades ago.
The insurance industry and its regulators have been grappling with LTC solvency and funding concerns for years. These range from the costly court-ordered liquidation of the Penn Treaty American Corp. companies to the push by LTC companies nationwide to get rate increases on their current business. GE's surprise disclosure that it would make statutory reserve contributions of about $15 billion over seven years has shined a brighter light on the predicament.
LTC insurance goes beyond medical costs and Medicare to pay for assistance in daily activities of the elderly and infirm, and can include private nursing homes and home healthcare. Insurers explain in their actuarial memos to insurance departments that big rate increases are necessary due to significantly higher-than-anticipated lifetime loss ratios resulting from wrong assumptions baked into the original policy pricing. Underwriters at the time, especially on older policy blocks, did not account for low lapse rates, longer lives, higher claims costs and a low-interest-rate environment when the policies were furnished.

S&P Global Market Intelligence has ranked companies with the 15 lowest ratios of total surplus to reserves based on year-end 2016 data. These companies appear to have the lowest cushion should they need to bolster reserves, although some have investment-grade parents or reinsurance agreements that could act as a backstop.
Three subsidiaries on this list have pending deals to be acquired. Two are through parent company Genworth Financial Inc., and the other is Kanawha Insurance Co., which has a deal with Continental General Insurance Co., a wholly owned subsidiary of HC2 Holdings Inc.
Given the significance of the issues at GE, analysts have become more cautious on all LTC blocks in the industry.
Evercore ISI life insurance analyst Thomas Gallagher said in a research note Jan. 24 that most insurers have been able to delay significant loss recognition and avoid substantial capital injections, but that the GE situation will ignite more scrutiny. It "will likely prompt more difficult conversations with auditors and regulators, particularly with looming [accounting standard changes] further bringing this to a head in the next 2 to 3 years," Gallagher wrote.
Against this backdrop, regulators and the life and health insurance industry worked together to come up with a plan to spread the pain of future insolvency assessments mandated by the state guaranty fund system. This move came as the high cost of liquidating Penn Treaty Network America Insurance Co. and American Network Insurance Co. started hitting health insurers. In December 2017 the National Association of Insurance Commissioners, the U.S. standard-setting body, expanded the guaranty funds' assessment base from chiefly health insurers to include life insurers and HMOs. A broad swath of the sector is working to get this approach enacted in state legislatures.
In the meantime, many LTC companies are requesting large rate increases, which are often granted at a sliver of the actuarially justified rate. Their success in obtaining approval in the requested amounts has varied greatly by state.
On multiple occasions, companies have agreed to substantially lower requested rate increases. They have accepted conditions such as phasing in rate hikes over a number of years or pledging not to file for subsequent hikes for specified time periods.
The industry's long, tough ride is likely to continue, industry observers say.
The National Organization of Life & Health Insurance Guaranty Associations is unaware of any impending company liquidation, but is "prepared for whatever may develop," said Sean McKenna, a spokesman for the group, which helps state life and health guaranty fund associations coordinate their efforts in the event of an insurer's insolvency.
Bill Goddard, an insurance law partner at Day Pitney LLP and a University of Connecticut School of Law professor who teaches insurance litigation and insurance solvency, put it another way. The GE LTC balance sheet reckoning is "not the light at the end of the tunnel — it’s an oncoming train," he said.
