In 2000, BusinessWeek wrote about Belle and Abe Lieberman, a Nebraska couple who had purchased a long-term care policy from Penn Treaty Network America Insurance Company. See “Long Term Policies That Will Last.” Back then, the Leiberman’s chief concern was not having purchased a policy that adjusted for inflation. When they increased their benefit from $50 to $100 a day, the yearly premiums jumped from $2,264 to $7,750. They could barely afford the insurance. Little did they know a decade ago that inflation adjustment might be the least of their worries.
About a year later, in April 2001, ElderWeb.com reported that Penn Treaty’s auditors had expressed doubts about the company’s 2000 financial statements. Penn Treaty’s reserves to pay claims had fallen below the regulatory limit and the carrier would need to generate an additional $40 million that year to ensure liquidity. See “Financial Problems for #2 LTC Insurer Penn Treaty.”
By July 8, 2004, Standard & Poor’s still rated Penn Treaty a B- but showed a positive outlook because the company had improved its underwriting and claims practices. The rating service found that the insurer was adequately capitalized but showing below-average earnings performance.
Although Penn Treaty continued to aggressively market and sell LTC policies to become one of the largest LTC carriers in the country, all was not well in the industry. In a March 26, 2007, report, the New York Times documented the mounting grievances and lawsuits against LTC insurers because of delays and bureaucracy. “Aged, Frail and Denied Care by Their Insurers.” In 2005, Penn Treaty was receiving one complaint for every 1,207 policyholders, one year after collecting $320 million in premiums. (By comparison, Genworth Financial received only one complaint for every 12,434 policyholders.) I spoke with reporter Charles Duhigg for this article, explaining how many LTC insurers conducted business as little more than profit centers, with little regard for their policyholders.
By October 3, 2007, complaints about claims-handling procedures prompted the Senate Finance Committee to conduct hearings. Complaints about LTC coverage had risen 92 percent between 2001 and 2006, reported the New York Times, “Scrutiny for Insurers of the Aged.” Congress asked Penn Treaty, along with Conseco and Genworth Financial, “to provide detailed information about how policyholders’ claims, inquiries and denials are handled and whether employees receive rewards for denying claims.”
In early 2008, rather than focusing on the delivery of services to its policyholders, Penn Treaty hired a new chief marketing officer to expand its national marketing efforts, and two national marketers to assist financial planners in selling Penn Treaty LTC policies. In October 2008, A.M. Best downgraded Penn Treaty’s financial strength from B- to D.
On January 8, 2009, The Street.com reported that Penn Treaty “fails,” two days after Pennsylvania insurance regulators seized the company. Options were to sell or liquidate. A March 13, 2009, letter to policyholders explained the Pennsylvania Insurance Commissioner Joel Ario is performing a financial analysis of the company with plans for “rehabilitation.”
What went wrong with Penn Treaty and what can other LTC carriers learn from its demise? First, it seems that Penn Treaty failed to properly underwrite the business, but no one noticed. The young, immature market, supported Penn Treaty’s mistakes because they continued to offer product at low prices. When the claims finally started coming in, faster and more furious than predicted, Penn Treaty had little choice but to do everything it could to limit claims pay exposure. This led it to stop being responsive to its customer’s needs and start chasing revenue by way ramping up sales. Hindsight is 20-20, but for Penn Treaty policyholders an old addage proved to be true:”if it sounds too good to be true, it probably is.”
And we can’t forget about Belle and Abe Lieberman, the Nebraska couple who sacrificed to pay for an LTC policy they believed would last. We hope the Pennsylvania Insurance Commissioner – and every insurance commissioner around the country who should be evaluating and regulating other LTC carriers before they fail – won’t forget them either.