Insurance Rehabilitation Plan Approval

In re Senior Health Insurance Company of Pennsylvania in Rehabilitation, 266 A.3d 1141 (Pa. Cmwlth. 2021), direct appeal, appeal docket 71 MAP 2021

The Maine Superintendent of Insurance, Massachusetts Commissioner of Insurance and Washington Insurance Commissioner (Regulators) filed this direct appeal from the Commonwealth Court’s order approving the Second Amended Plan of Rehabilitation filed by Jessica K. Altman, Pennsylvania Insurance Commissioner, in her capacity as Statutory Rehabilitator of Senior Health Insurance Company of Pennsylvania (SHIP). SHIP, a Pennsylvania life and health insurance company, was placed in rehabilitation due to negative capital and surplus. As Commonwealth Court summarized:

SHIP was licensed in 46 states (excluding Connecticut, New York, Rhode Island, and Vermont), the District of Columbia, and the U.S. Virgin Islands. Through its predecessors, SHIP issued approximately 645,000 long-term care policies; as of December 31, 2020, 39,148 policies remained in force. SHIP’s policies cover long-term care services provided in congregant settings, such as nursing homes and assisted living facilities, as well as home-based health care services and adult day care. The states with the greatest number of SHIP long-term care policies in force as of December 31, 2020, are Texas with 4,960 policies; Florida with 4,040 policies; Pennsylvania with 3,862 policies; California with 3,183 policies; and Illinois with 1,753 policies. By contrast, the three states represented by the intervening state regulators in this matter have comparatively fewer policies in force; as of year-end 2020, there were 316 policies in force in Maine, 296 in Massachusetts, and 1,287 in Washington.

Slip op. at 3-4 (record citations omitted).

The Second Amended Plan

Commonwealth Court summarized the background relevant to the Second Amended Plan as follows:

At present, SHIP has approximately $1.4 billion in assets and $2.6 billion in liabilities, producing a deficit of approximately $1.2 billion (also referred to as the Funding Gap). The Second Amended Plan’s ultimate goal is to eliminate the Funding Gap by increasing premium revenue and modifying the existing terms of most of the approximately 39,000 policies in force. The Plan is structured to maximize policyholder choice in several ways. Depending on his circumstances and preferences, a policyholder may choose to continue his policy with all benefits and terms unchanged by paying the actuarially justified annual premium for that policy. Alternatively, the policyholder may choose to reduce some policy coverages as more suitable to the policyholder’s current circumstances in order to avoid or temper a premium increase. A policyholder who is 95, for example, may decide to reduce the maximum coverage period from 10 to 5 years in lieu of paying the premium required for a policy with a 10-year period of coverage.

The Second Amended Plan also seeks to correct SHIP’s discriminatory premium rate structure. At present, SHIP policyholders pay substantially different premiums for the same coverages. The difference in premiums is attributed to the decisions of different state regulators on SHIP’s proposed rate increases. The state where the policy is issued retains authority for all rate increases, even after the policyholder moves to another state. Policyholders whose state of issue has approved the requested rate increase pay more for the same coverages than policyholders whose state of issue has disapproved the requested rate increase. As a result, the former group of policyholders pays more than its fair share of the costs of providing the coverages and the latter group pays less than its fair share. The Second Amended Plan seeks to eliminate these inequities.

Slip op. at 2-3. Specifically, the Second Amended Plan:

… is designed to be implemented in three phases. Phase One, beginning immediately upon Court approval, is the principal phase and seeks to reduce substantially or eliminate the Funding Gap. This phase identifies the SHIP policies that require modification because their current premium falls below the “If Knew Premium” for the benefits provided by the policies. Ex. RP-55 at 10. The If Knew Premium rate is the rate that, if charged from inception, would have produced an underwriting loss ratio of 60% for each policy form. Id. at 27. If Knew Premium rates are intended to price policies adequately on a lifetime basis, but not to recoup losses due to inadequate pricing in the past. Further, the policyholder’s age and current medical condition are not taken into account when setting the If Knew Premium rate. The If Knew Premium is an accepted methodology for setting premiums for long-term care insurance policies.

Policyholders whose current premium (including the premium they would be paying but for a premium waiver) falls below the If Knew Premium for the policy’s benefits will be required to elect one of four options:

Option 1: continue paying the current premium or maintain the premium waiver if one is in effect, but if the current or waived premium is less than the If Knew Premium, have the policy benefits reduced in accordance with Plan provisions so that the premium for the reduced benefits (including waived premium) is equal (on an If Knew Premium basis) to the current premium. The benefit reductions will be selected automatically by the Plan.

Option 2: select certain policy endorsements that provide essential benefits (sometimes greater than the benefits provided by Option 1) for an actuarially justified premium. The maximum benefit period is capped at four years, the maximum daily benefit is capped at $300 and inflation protection is capped at 1.5%.

Option 2A: an enhanced alternative with a five-year benefit period and 2% inflation rider. Options 2 and 2A will not be subject to further rate increases or benefit reductions in Phase Two of the Plan. Options 2 and 2A are designed to provide reasonable coverage at reasonable premium rates.

Option 3: Non-forfeiture Option (NFO) through which the policyholder will receive a Reduced Paid-up (RPU) policy providing limited benefits but for which no future premiums will be charged. Under the Plan, this option will include more generous benefits than the typical industry non-forfeiture option or reduced paid-up policy, most notably in that it will offer as much as a 30-month benefit period unless the current policy has a shorter benefit period. Moreover, policyholders who select this option will never have to pay additional premiums and this policy will never lapse.

Option 4: retain the current policy benefits and pay the corresponding If Knew Premium (unless equal to or lower than the policyholder’s current premium). For many policyholders this may require a substantial increase in premium.

Policyholders who presently pay a premium at or above the If Knew Premium may elect Option 2 or Option 3 if preferable, given their present circumstances. Otherwise, these policyholders will not have their policies modified in any respect.

Slip op. at 6-8 (record citations omitted).

Regulators’ Objections

The Intervening Regulators objected to the Second Amended Plan on the basis that, inter alia, the Plan proposes to have premium rates set by the Rehabilitator and the Court rather than by state-of-issue regulators, and argued that:

…the Rehabilitator’s power under Article V to “direct and manage” the “property and business of the insurer,” Section 516(b) of Article V, 40 P.S. § 221.16(b), does not include authority to change “SHIP’s policies and rates without required regulatory approvals.” They also assert that the Plan’s deviation from the ordinary state-by-state rate review process violates the Full Faith and Credit Clause of the United States Constitution and is inconsistent with the principle of comity. The Plan’s Issue State Rate Approval Option does not cure these infirmities because it is coercive and offers, at most, a “nominal deference” to the state of issue’s authority to regulate the premium rates for policies issued in that state.

The Intervening Regulators assert that the Plan’s rate approval provisions “override the insurance laws of other [s]tates” and, thus, violate the Full Faith and Credit Clause of the United States Constitution. Alternatively, the Intervening Regulators contend that this Court should refrain from approving the Plan under the principle of comity because the Plan’s “displacement of the rate setting authority of the individual [s]tates” is a “blatant intrusion” on the sovereignty of other states.

Slip op. at 48-49, 52 (footnote and record citations omitted).

Commonwealth Court Hearing

Commonwealth Court held a hearing on the Second Amended Plan. The Special Deputy Rehabilitator Patrick Cantilo, testified that, in preparing the Second Amended Plan, the Rehabilitator considered:

… the input of state insurance regulators, staff of the National Association of Insurance Commissioners, policyholders and other formal and informal commenters. The Rehabilitator’s team prepared extensive analyses of SHIP’s finances, its policyholders, the long-term care insurance market, and other matters relevant to SHIP’s condition and prospects for rehabilitation. Key data and information have been made available to interested persons through a data site, which included actuarial files relating to assumptions and analyses, a seriatim actuarial file for every policy at issue, and tailored reports related to the Second Amended Plan.

Slip op. at 15. Cantilo testified that the principal concerns raised by state insurance regulators related to: (1) treatment of reinsurance assumed; (2) setting of premium rates by the Rehabilitator and this Court rather than by state-of-issue regulators; (3) desirability of liquidation instead of rehabilitation; and (4) feasibility of the Second Amended Plan. As to the first issue, Cantilo testified that:

SHIP’s assumed reinsurance involved approximately 2,000 long-term care policies originally issued by American Health and Life, Primerica and TransAmerica, or the predecessors of those companies. SHIP’s predecessors entered into agreements to reinsure 100% of these policies and administer claims. In the case of TransAmerica, on December 29, 2020, this Court approved an agreement by which TransAmerica recaptured its policies from SHIP. Cantilo opined that the recapture was consistent with industry norms.

Slip op. at 20-21. Regarding the state regulators’ contention that the state where the policyholder resided when the policy was issued is solely responsible for the regulation of the policy’s premium rate, Cantilo testified that “this makes sense for solvent insurers, but when an insurer enters rehabilitation, the domiciliary state has sole responsibility for the insolvent insurer and the restructuring of its business. This responsibility includes the adjustment of premiums and policy coverages where necessary to correct the insurer’s financial condition.” Slip op. at 21. Cantilo explained:

… the Intervening Regulators’ legal assertion that they have the right to review and approve premium rates for policies issued by SHIP in their states creates “some ironic consequences.” For example, 34 policies issued in Maine, 84 policies issued in Massachusetts and 89 policies issued in Washington are held by policyholders who now reside in other states. Thus, the Intervening Regulators assert the right to set the rates for 207 policyholders who live outside of their states. Further, 21 policyholders who reside in Maine, 83 policyholders who reside in Massachusetts and 87 policyholders who reside in Washington had their policies issued in other states. Under the Intervening Regulators’ legal assertion, other state regulators would set the rates for 191 policyholders residing in the states represented by Intervening Regulators. In short, their inflexible view of rate regulation results in approximately 400 policyholders residing in Maine, Massachusetts and Washington having their rates set by states in which they do not reside. The better approach, in Cantilo’s view, is for the domiciliary regulator of an insurer in rehabilitation to manage rate and contract modifications as part of a comprehensive rehabilitation plan.

Nevertheless, the Second Amended Plan contains an Issue State Rate Approval Option. As Cantilo explained, every state will be given the option of opting out of the rate approval section of the Second Amended Plan. If a state opts out, the Rehabilitator will file an application to increase premium rates for policies issued in that state to the If Knew Premium level. No rate increase will be sought for policies on premium waiver or which are already at or above the If Knew Premium. The Rehabilitator will file the application on a seriatim basis to eliminate subsidies and restore a level playing field. The regulator for the opt-out state will then render a decision on the application; if it is only partially approved, the Rehabilitator will downgrade the benefits for the affected policies. Cantilo testified that this is essential to eliminate the subsidies that exist between policyholders across states by virtue of uneven rate increase approvals over the years. Each opt-out state policyholder will still have four options, which are not exactly the same as those offered in the Second Amended Plan. They are: (1) pay the approved premium and have benefits reduced to match; (2) accept a downgrade of benefits to match the current premium; (3) accept an issue-state non-forfeiture option; or (4) keep the current benefits and pay the If Knew Premium. Cantilo pointed out that the nonforfeiture option available to opt-out policyholders will not be as generous as the enhanced non-forfeiture option in Option 3 of the Second Amended Plan. There will also be no “basic policy benefits” option, i.e., Option 2 in the Plan.

Slip op. at 21-22 (footnote and record citations omitted). As to the issue of the preferability of liquidation, Cantilo testified that:

In this regard, the Intervening Regulators focus on the present value of future benefits less the present value of future premiums, also referred to as the “Carpenter value,” to support their view that policyholders would fare better in a liquidation. Cantilo criticized this measure because it does not give an accurate picture of a policyholder’s situation. He offered the example of an actual 92-year-old SHIP policyholder currently paying $2,761 for a policy with unlimited benefits. Using the Intervening Regulators’ preferred methodology, the “Carpenter value” of that policy is $33,890, which is higher than the “Carpenter value” produced under any of the four Plan options. However, to receive this value of $33,890, the policyholder would have to pay $11,520 in annual premium. By contrast, this policyholder could choose Option 3, a paid-up policy with a slightly lower “Carpenter value” of $33,550. With a paid-up policy, however, this policyholder would receive 2.5 years of coverage and never pay another premium. Cantilo offered other examples where Option 3 would be the best option for a policyholder, given the amount of premium the policyholder would be required to pay to the guaranty association in a liquidation. Cantilo opined that these are not exceptions; “[t]here are many cases where the raw projection of future benefits less future premium doesn’t really tell you what the real value of the policy is.”

Cantilo discussed several different ways to compare the value of the Plan options to what would be available in a liquidation. Using the Intervening Regulators’ standard of present value of future benefits less present value of future premiums, 85% of policyholders will have at least one option as favorable as liquidation and 15% will not. Using the present value of future benefits divided by annual premiums, those numbers are 79% and 21%. Using the maximum policy value divided by annual premium, those numbers are 89% and 11%. Using the maximum policy value less present value of future premiums, those numbers are 96% and 4%. Finally, using the Rehabilitator’s preferred standard of maximum policy value, also referred to as the “benefit account value” or “lifetime maximum benefit” in some policies, 100% of policyholders will have at least one option in the Plan that offers the same or a better value than in a liquidation. 

Cantilo acknowledged that these are actuarial techniques that rely on the exercise of professional judgment. He opined that the maximum policy value is what policyholders use when they purchase an insurance policy, i.e., the maximum daily benefit and the maximum benefit period.

Cantilo offered additional reasons to explain why rehabilitation is preferable to liquidation. First and foremost is the value of policyholder choice. Second, the Second Amended Plan contains features that would not be available to policyholders in liquidation, such as an option to retain their current policy level of coverage, which may exceed the applicable guaranty association cap, by paying the If Knew Premium. Third, there is the enhanced non-forfeiture option that provides reasonable coverage for no additional premium. In a liquidation, the non-forfeiture option would be locked into the policy’s present coverages and terms, which may result in a very short period of coverage. Fourth, the Plan reduces or eliminates the subsidies in the current rate structure, which cannot be done in a liquidation.

Slip op. at 23-24 (record citations omitted). As to the likelihood of success of the plan, Cantilo opined that the Plan is designed to eliminate the Funding Gap over three phases and while not likely to happen in Phase One, Phase One will materially reduce the Funding Gap. Finally, Cantilo testified that:

 …the SHIP policies contain provisions that allow SHIP to modify the premium rate. Some policies provide that rate increases will require the approval of state regulators, while others specify that rate increases may be sought only where an increase is warranted given the claims experience of the cohort of policyholders covered by the same policy form. Cantilo stated that these provisions are standard in long-term care insurance policies. The Rehabilitator designed the If Knew Premium methodology in the Second Amended Plan to be consistent with the standards for setting long-term care insurance premium rates, which are substantially the same in every state.

Slip op. at 25-26. Vincent Bodnar, an actuarial consultant, who was admitted as an actuarial expert and as an expert on long-term care insurance, including product development and sales practices, the rate setting and approval process for insurers, and the liquidation of financially troubled insurers, also testified on behalf of the Rehabilitator that:

… it is common for an insurer to receive mixed responses to a premium rate increase request from state regulators because each state has its own approach to reviewing rates. Additionally, the rate review process typically takes between 90 days and 2 years. Protracted rate reviews with drastically different outcomes have resulted in some SHIP policyholders paying a premium rate that subsidizes the inadequate premium rates of other SHIP policyholders. The Second Amended Plan seeks to eliminate this inequitable discrimination in premium payments.

Bodnar explained how the different Phase One options relate to Phase Two of the Plan. Policyholders who elect Options 1 and 4 and have a policy providing coverage in excess of the guaranty association limits will be subject to a rate increase in Phase Two. Phase Two seeks to deploy a self-sustaining premium rate methodology, which will keep the lifetime loss ratio at 60% and thus be actuarially justified. Phase Two is not absolutely necessary under the Second Amended Plan because Phase One could close the Funding Gap, or the assumptions deployed in Phase One could play out differently than projected. Bodnar opined that any meaningful reduction in the Funding Gap during the rehabilitation would be a success.

Bodnar opined that a rehabilitation as proposed in the Second Amended Plan, as opposed to an immediate liquidation, presents policyholders with better options; sets the premium rates to equitable levels; and reduces SHIP’s Funding Gap. There is no formulaic method to determine whether policyholders are better off in a rehabilitation or in a liquidation; the so-called “Carpenter test” is not an actuarial test. Policyholders who choose Option 4 will have a policy with a net present value greater than or equal to what they would have in liquidation because it will not be capped at the level set forth in the applicable guaranty association statute. However, Option 4 has the least effect on reducing the Funding Gap.

Bodnar opined that policyholders are likely to consider the maximum policy value/premiums analysis or the maximum policy value analysis in making determinations. The present value analysis, or “Carpenter test,” is appropriate for evaluating the impact of the Phase One options on SHIP’s liabilities. However, he explained that policyholders do not use a present value analysis when they choose their long-term care insurance coverage. Nor would they rely solely on the present value analysis to select one of the options offered under the Second Amended Plan.

Slip op. at 28-31 (record citations omitted).

Frank Edwards, the vice president and chief life and health actuary of INS Consultants, testified as a fact witness on behalf of the intervening state Regulators that:

…under the Second Amended Plan, policyholders bear the responsibility for the $1.2 billion Funding Gap through benefit reductions and premium increases. By contrast, in liquidation, policyholders would bear a burden of approximately $397 million, and the guaranty associations would bear a burden of approximately $837 million. This represents the difference between the net amount the guaranty associations would pay to policyholders and the distributions they would receive from the SHIP estate. Because a rehabilitation does not trigger the guaranty associations, these funds will not be available to benefit policyholders under the Second Amended Plan.

Edwards observed that among the four options in the Second Amended Plan for Phase One, Option 4 provides a net present value for approximately 83% of policyholders that is greater than they would receive in a liquidation. The other options provide policyholders with a net present value that is lower than they would receive in liquidation.

Oliver Wyman presented 10 scenarios to illustrate the potential results of the Second Amended Plan for SHIP’s liabilities, each leaving a deficit that ranged from $699 million to $186 million. Only Scenario 11, later added, eliminates the Funding Gap. Based on the information provided by Oliver Wyman, Edwards calculated a “Best Interest” scenario, which assumed that each policyholder will choose the option that provides the greatest net present value, or “Carpenter value.” Option 4 would give 67.13% of the policyholders the greatest net present value and would reduce SHIP’s Funding Gap by $184 million. 

Edwards addressed a comparison of rehabilitation to liquidation under Phase Two. Edwards calculated the effects of hypothetical Phase Two premium increases on policyholders who selected Option 4 in Phase One. Assuming a premium increase of 50% in Phase Two, the percentage of policyholders receiving a net present value greater than in a liquidation under Option 4 drops to 33.89%. The percentage of policyholders in a rehabilitation, in the aggregate, that would receive a net present value greater than liquidation is 54.57%. Assuming a premium increase of 100% in Phase Two, the percentage of policyholders for whom Option 4 provides a net present value greater than in a liquidation drops to 22.92%. The percentage of all policyholders in a rehabilitation, in the aggregate, that would receive a net present value greater than in a liquidation is 47.21%. Even so, these hypothetical premium increases of 50% and 100% would leave remaining a Funding Gap of approximately $858 million and $676 million, respectively.

Edwards observed that the information presented by Oliver Wyman indicated that the net present value of Option 2 for policies with benefits in excess of guaranty association limits is typically less than the net present value of the guaranty association limits.

Slip op. at 32-33 (record citations omitted). Commonwealth Court noted that Edwards “did not evaluate Oliver Wyman’s work. He compared the Second Amended Plan to liquidation using hypotheticals in which policyholders made elections based solely on maximizing the present value of future policy benefits minus the present value of future premiums, or the ‘Carpenter value.’” Slip op. at 33.

Commonwealth Court Decision

Commonwealth Court concluded that the plan serves a rehabilitative purpose and is within the discretion of the rehabilitator, reasoning that:

The unrefuted testimony of the Rehabilitator’s witnesses established two overarching goals of the Second Amended Plan: (i) to reduce or eliminate the Funding Gap and (ii) to eliminate SHIP’s inequitable and discriminatory premium rate structure, which is marked by cross-policyholder subsidies. The Plan will meet these goals by setting premium rates for all policyholders pursuant to an actuarially sound methodology, the If Knew Premium rate, which is widely accepted by regulators across the country, and by offering policyholders meaningful options. Instead of being forced to accept rate increases commensurate with their current coverages, policyholders will have the option to reduce coverages, thereby reducing their indicated premium increase.

In pursuing these goals, the Second Amended Plan addresses one of the major causes of SHIP’s financial distress: policy underpricing. The Plan will address underpricing by (i) resetting premiums, on a prospective basis, to what they would have been without the erroneous actuarial assumptions and (ii) doing so on a seriatim basis, thereby ensuring that the premiums going forward are consistent across the entire pool of policyholders so that similarly situated policyholders will not be paying different premiums. The Plan will give policyholders meaningful choices for coverage in lieu of rate increases, without placing the cost of SHIP’s historical policy underpricing upon the public through the guaranty association system. These goals serve the public good. See Mutual Fire II, 614 A.2d at 1094, n.4 (determining that the state’s interest in “regulat[ing] the fiscal affairs of its insurers for the welfare of the public” is a legitimate and significant public purpose).

Slip op. at 43-44. As to the Regulators’ objections, the court noted that the Regulators “did not introduce an expert witness to dispute any of the Rehabilitator’s actuarial projections, including the impact of the various options on policyholders and the Funding Gap, or the Plan’s proposed premium rate methodologies,” relying solely on the testimony of Edwards, who testified as a fact witness, and acknowledged that he was not asked to evaluate the Rehabilitator’s work. The court further explained:

Edwards’ testimony consisted of “mathematical exercises,” that compared the Plan to a liquidation. He assumed that policyholders are “better off” with the “maximum present value” of their policies. Known as the “Carpenter value,” maximum present value is future benefits minus future premiums, adjusted to their present value. Edwards acknowledged that he could not opine on policyholder preferences. Cantilo and Bodnar, both qualified experts, testified persuasively that policyholders do not make choices based on the maximum present value of their policies. Rather, policyholders will rely on other metrics, most notably the maximum policy value, such as maximum daily benefit and maximum benefit period, to make choices. Using those metrics provides a better outcome for policyholders than they would experience in liquidation.

Slip op. at 44 (record citations omitted). The court concluded that “the Rehabilitator’s evidence demonstrated that immediate liquidation of SHIP would be improvident for several reasons”:

First, a liquidation of SHIP will not address the Funding Gap. Second, a liquidation will not address the existing inequitable premium rate structure and cross-policyholder subsidies. Instead, it will perpetuate those problems. Third, a liquidation of SHIP will unnecessarily delay any resolution of SHIP’s financial condition. Fourth, the options available to policyholders under the Second Amended Plan are better than what would be offered by guaranty associations in a liquidation.

Slip op. at 44-45. The court also held that the plan’s rate approval mechanism and issue-state rate approval alternative was within the Rehabilitator’s discretion, reasoning that:

The Rehabilitator may “take such action as [she] deems necessary or expedient to correct the condition” that caused the need for rehabilitation, 40 P.S. § 221.16(b), and in doing so, she may prepare a rehabilitation plan to “impair the contractual rights of some policyholders in order to minimize the potential harm to all of the affected parties.” Consedine v. Penn Treaty Network American Insurance Co., 63 A.3d 368, 452 (Pa. Cmwlth. 2012) (Penn Treaty) (citing Mutual Fire II, 614 A.2d at 1094) (emphasis added). This authority includes a reduction of coverage to match the policyholder’s existing premium. It has long been understood that the legislature has vested the Rehabilitator with broad discretion in proposing a rehabilitation plan

Slip op. at 50. As to Regulators’ constitutional challenges, the court found that the Regulators “presented no reason to set aside Pennsylvania’s primacy in SHIP’s receivership,” explaining that:

Because Maine, Massachusetts, and Washington have adopted the [Uniform Insurers Liquidation Act (UILA)] and Pennsylvania has adopted the similar Model Act, a single, cohesive, uniform handling of SHIP’s rehabilitation through a single state is consistent with those laws. Notably, the laws of Maine, Massachusetts and Washington also designate the domiciliary insurance commissioner as the receiver of an insurer undergoing liquidation or rehabilitation.

Slip op. at 53. The court further held that the Second Amended Plan would give full faith and credit to the insurance laws of Maine, Massachusetts, and Washington, reasoning:

Here, the evidence established that the ordinary rate filing process often involves 6 to 12 months of preparation and years of review in some states. “No interest is served by adding to the delay which has already occurred in this case.” Mutual Fire I, 572 A.2d at 803. Further, a state-by-state rate filing process would not address the inconsistent rate approvals from state insurance regulators, which leave SHIP with less revenue than needed and similarly situated policyholders paying vastly different premiums for the same coverage. Cantilo credibly testified that the Plan’s premium rate methodologies and approval mechanisms are necessary to address the inequities in SHIP’s current rate structure. The use of the If Knew Premium across all policies will put all policyholders on a level playing field because it is calculated on a seriatim basis.

In sum, under Article V, the Rehabilitator has the authority to propose, and this Court has the authority to approve, the Second Amended Plan’s provisions regarding the establishment of premium rates for the four policyholder options in Phase One. The Full Faith and Credit Clause does not require the Rehabilitator to submit these premium rates to 46 states, the District of Columbia, and the U.S. Virgin Islands for their review and approval. This would fracture Pennsylvania’s “own legitimate public policy” in the rehabilitation of SHIP, a Pennsylvania-domiciled insurer. Hyatt I, 538 U.S. at 497, 123 S.Ct. 1683. In no way does this aspect of the Second Amended Plan reflect “a policy of hostility to the public Acts of a sister State.” Id. at 499, 123 S.Ct. 1683. To the contrary, the interests of Maine, Massachusetts, and Washington in ensuring that long-term care insurance premium rates are not excessive, unfairly discriminatory, or unreasonable to the benefits provided will be advanced, rather than impaired, by the Plan.

Slip op. at 60-61. The court also rejected the Regulators’ comity argument on the basis that:

Application of comity is “a matter of judicial discretion,” and Pennsylvania courts exercise comity “when application of another state’s law contradicts no public policy of Pennsylvania and instead furthers a Pennsylvania policy.” Chestnut v. Pediatric Homecare of America, Inc., 420 Pa.Super. 598, 617 A.2d 347, 350 (1992). The Plan has “sensitively applied principles of comity with a healthy regard” for the insurance laws of other states by “relying on the contours of [Pennsylvania insurance law] as a benchmark for its analysis.” Hyatt I, 538 U.S. at 499, 123 S.Ct. 1683.

Once this Court renders a judgment on the Second Amended Plan, it is Maine, Massachusetts, and Washington that owe this Court’s judgment full faith and credit. See Underwriters National Assurance Co. v. North Carolina Life and Accident and Health Insurance Guaranty Association, 455 U.S. 691, 102 S.Ct. 1357, 71 L.Ed.2d 558 (1982). See also 1 COUCH ON INSURANCE 3d § 5:31 (discussing state court’s violation of Full Faith and Credit Clause by refusing to treat prior judgment of another state’s insurance rehabilitation court as res judicata).

Slip op. at 61. In approving the Second Amended Plan over the Regulators’ objections, the court summarized its conclusion:

The Rehabilitator has made a compelling case in support of her Second Amended Plan of Rehabilitation. Indeed, her evidence was not contradicted on any material fact. The Intervening Regulators suggest that they would have exercised their discretion differently, but this is not a basis for the Court to disapprove the Plan.

The opposition of the Intervening Regulators is based upon their belief that the state-by-state regulation of premium rates must be the starting point of any plan to rehabilitate an insolvent insurer. The Court has several responses.

First, the standard for an appropriate premium rate is substantially the same in every state: the premium must be reasonable in relation to the coverage provided in the policy. The evidence presented at the hearing demonstrated that the premium rates used in the four options in Phase One of the Second Amended Plan will satisfy that standard. The Rehabilitator will be tasked with proving satisfaction of that standard in her actuarial memorandum. The Intervening Regulators presented no evidence that she cannot or will not be able to do so.

Second, the Issue State Rate Approval Option preserves the state-by-state procedure for those states that share the concerns of the Intervening Regulators. To the extent a state does not believe that the Rehabilitator, and this Court, should be solely responsible for the task of establishing the seriatim premiums used for the four policyholder options in Phase One, the state can assume responsibility to do so by opting out of this aspect of the Second Amended Plan.

Neither SHIP’s policies nor state rate regulatory statutes insulate policyholders from paying a reasonable premium for their coverage. To the contrary, they require the opposite. The Second Amended Plan will advance, not undermine, a reasonable and non-discriminatory premium rate structure, which is the point of rate regulation.

Essentially, the Intervening Regulators exalt the process by which insurance premium rates are set over the rehabilitation of an insolvent insurer whose condition was caused by an inadequate and discriminatory premium structure. As was established by the Rehabilitator’s evidence, a rehabilitation of SHIP cannot be accomplished by placing the correction of the company’s premium rates into the hands of 46 states.

In all respects, the Second Amended Plan satisfies applicable constitutional requirements. Neither the Full Faith and Credit Clause nor principles of comity require this Court to apply the insurance rate regulatory laws of other states when considering a plan to rehabilitate SHIP, a Pennsylvania domiciled insurer in receivership. Nevertheless, the Seconded Amended Plan, consistent with Article V, does not evidence “a policy of hostility” to the laws of sister states. Rather, it advances their shared interests in insurance premium rates that are not unfairly discriminatory and reasonable in relation to the benefits provided in the policy.

The Intervening Regulators support a liquidation because it will require guaranty associations to solve SHIP’s Funding Gap. However, a liquidation will do nothing to address SHIP’s discriminatory premium structure. As NOLHGA’s actuary, Matthew Morton, explained, guaranty associations can make rate filings with the state of issue but only on a cohort basis, for the segment of policies covered by the filing guaranty association. As a consequence, Morton opined that in a liquidation, many SHIP policyholders will pay more than the If Knew Premium rate for their coverage while others will pay less. Guaranty associations have no opportunity to propose or implement the seriatim If Knew Premium rate that is central to the Second Amended Plan’s correction of the current inadequate and discriminatory premium rate structure. This reason alone supports the Rehabilitator’s decision not to liquidate SHIP.

There is nothing unfair about expecting every policyholder to pay an actuarially justified premium for their coverage. That is expected in any insuring system. In the case of SHIP, it will not happen in the absence of the implementation of the Second Amended Plan.

The Rehabilitator has persuaded the Court that rehabilitation is preferred for another reason. A liquidation will place the burden of an actuarially justified premium upon the policyholders of member insurers of the applicable guaranty associations and, ultimately, upon the taxpayers in those states. No one has provided the Court with an explanation as to why, as a matter of policy, the premium burden of SHIP’s policyholders should be borne by others.

For these reasons, the Court rejects the arguments of the Intervening Regulators. The Court concludes that the Rehabilitator has appropriately exercised her discretion in devising a plan that will address SHIP’s financially hazardous condition while protecting the interests of the policyholders, creditors and public generally.

Slip op. at 79-82.


For more information, contact Kevin McKeon or Dennis Whitaker.