1 ANATOMY OF AN INSOLVENCY Katie School of Insurance Insurance - - PowerPoint PPT Presentation

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ANATOMY OF AN INSOLVENCY Katie School of Insurance Insurance Financial Regulators June 1, 2020

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Starting with a Thank You

• Kelvin Schill

– Past Chair – Illinois Life & Health Insurance Guaranty Association – COUNTRY Life Insurance Company – Senior Vice President, Financial Services & Operations

• Janis Potter

– Executive Director

• Illinois Life & Health Insurance Guaranty

Association

Brief Bios

Kelvin Schill

Kelvin Schill is Senior Vice President of Financial Service Operations at COUNTRY Life Insurance Company. He previously served as vice president of Financial Products and Chief Actuary of COUNTRY Life Insurance Company and COUNTRY Investors Life Assurance Company and responsible for the design, pricing and support of financial products. Prior to joining COUNTRY, Schill worked with General Electric’s direct insurance business. He held various positions as GE, including valuation actuary, quality leader, risk leader, P&L leader, and culminating in business leader and chief operating officer. Schill is a Fellow, Society of Actuaries and Member, American Academy of Actuaries. Kelvin is past Chair of the Illinois Life & Health Insurance Guaranty Association.

Janis Potter

Janis Potter is the Executive Director of the Illinois Life & Health Insurance Guaranty Association. She provides leadership in supporting insolvency, organizational and financial plans with the Board of Directors and staff, and carries out plans and policies authorized by the Board. She is the primary contact to the Board of Directors and the Executive, Compensation, Nominating, Audit, Finance, Legal and Claims Committees, including the responsibility for oversight of staffing of all committees.

• Ms. Potter is active in many NOLHGA committees,

including Task Force Chair for a health insolvency. Prior to joining the Associations, Ms. Potter was Vice President at Mutual Trust Financial Group.

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An Insolvency Unfolds

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Understanding the Insolvency Process

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What are Capital Standards for Insurers?

Capital Standards Refers to the Rules That the Insurance Commissioners Have for Making Sure That an Insurer Has Enough Money Available to Pay Claims When Made Requirements Vary Depending

• n the Line of Business –

Taking Into Account the Nature

• f the Assets, Liabilities and

Underwriting Risks of the Company

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Why do Capital Standards Exist?

All 50 States Have Adopted the NAIC’s Risk Based Capital (RBC) Framework for Establishing Capital Standards RBC Requirements are Calculated On a Legal Entity Basis

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Our mission is: "To protect consumers by providing assistance and information, by efficiently regulating the insurance industry's market behavior and financial solvency, and by fostering a competitive insurance marketplace.”

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Our Mission to Illinois Policyholders: To protect policyholders and their beneficiaries in the payment

• f covered claims or continuation of

coverage benefits of an insolvent life, health and annuity insurance company, to educate the general public, and to aid the Department of Insurance in its detection and prevention of insurer insolvencies.

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How Does Guaranty System Provide Policyholder Protection?

The Guaranty System serves as a Safety Net for policyholders

• f insolvent insurers that are member insurers

Guaranty funds are created by state law, but are not state entities Requires “An Order of Liquidation” before paying benefits

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How an Insolvency Works

Order of Rehabilitation or Liquidation received Association’s role is to pay benefits up to statutory limit Assessments made to member

• rganizations to settle policy

and coverage obligations

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What are the Statutory Limits?

Life Insurance

• $300,000 death benefit
• $100,000 cash surrender value

Health Insurance

• $500,000 major medical
• $300,000 disability insurance
• $300,000 long-term care
• $100,000 other health insurance

Annuity

• $250,000 in present value

Unallocated Annuity

• $5,000,000 in benefits

Structured Settlement Annuity

• $250,000 in present value

Aggregate Limit

• Per company per life
• $300,000 (except for major medical)
• $500,000 for major medical

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NO TWO THE SAME

Penn Treaty – Long Term Care Lincoln Memorial – Life Insurance

• Insolvencies
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• K. Schill & J. Potter

Primary Causes of an Insolvency

❑Deficient loss reserves and/or inadequate

prices (28%)

❑Rapid premium growth (21%) ❑Alleged fraud (10%) ❑Overstated assets (10%) ❑Significant changes in business (9%) ❑Reinsurance failures (7%) ❑Catastrophe losses (6%) ❑Other (9%)

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HOUSE OF CARDS COME TUMBLING DOWN

• 1. Early Warnings
• 2. What Went Wrong
• 3. How Long Before Insolvency
• 4. Regulator Action
• 5. Guaranty Association Coverage
• 6. Lessons Learned

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Long Term Care Policyholders

• Old people slide

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LONG TERM CARE

PENN TREATY

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Penn Treaty (Policies Underpriced)

Sufficient rate increases not sought/obtained Inflation riders tremendously underpriced at younger issue ages Initial actuarial assumptions were wrong

Lapse and mortality rates Interest rates Emergence of assisted living facilities

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Penn Treaty – Overview for Illinois as of March 1, 2017

Total number of policies – 3,434 Anticipated Claims Payments - ~$115 million* Anticipated Premium - ~$32 million* Total Anticipated Liabilities (Before Estate Assets) - ~ $92 million* Estate Assets - ~$7.3 million *present value

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HOUSE OF CARDS COME TUMBLING DOWN

• 1. Early Warnings
• 2. What Went Wrong
• 3. How Long Before Insolvency
• 4. Regulator Action
• 5. Guaranty Association Coverage
• 6. Lessons Learned

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WHAT’S AHEAD

ON THE INSOLVENCY HORIZON

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Rehabilitation Date – January 29, 2020 Rehabilitation Plan Filing – April 22, 2020

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• $916 million deficit @ 12/31/19
• 88% of policyholders > 80 years old
• 38% of policies with inflation benefit
• 64% of policies pay indemnity benefits
• 55% of policies are premium paying

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Data as of January 31, 2020

In-Force Business

• Policy Count
• On Claim
• Premium
• Annual Premium Per Policy
• Current Daily Benefit
• Average Historical Rate Increase
• Distribution by Policy Count

Illinois

2,069 269 $5,172,429 $2,500 $171 150% 4%

Total

47,260 6,002 $88,803,213 $1,879 $172 91% 100%

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Lincoln Memorial Life Insurance Company (licensed in 35 States)

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What’s the Scoop

• 2008 Insolvency involved both:

– Texas domiciled life company – Missouri based preneed funeral contract company

• Both companies were owned by

members of the Cassity family

• Insolvency was the result of

systematic raiding of the companies

• Investment advisor who did what

he was told

• Inadequate controls on cash

being transferred from the trusts

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Use of Corporate Funds for Personal Purposes

• ~$150,000 spent on a week

long yacht trip in the Caribbean

• Millions funneled into other

businesses owned by the family

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Lawsuit & Timeline

• Filed in Federal Court-St. Louis in 2009
• Plaintiffs include:

– Texas Special Deputy Receiver – Seven Guaranty Associations – including Illinois – NOLHGA as assignee for other 28 Guaranty Associations

• Breach of fiduciary duty
• Timeline:

– June 1, 2014: Fact Discovery Cutoff – September 15, 2014: Expert Discovery Cutoff – October 15, 2014: Motions for Summary Judgment – January 22, 2015: Pretrial Conference – February 2, 2015: Trial Begins

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Civil Suit Was Stayed-- Criminal Indictments

• 6 with Felony

Sentences

• Serving 18 to

115 months

Douglas Cassity: 9 years 7 months Brent Cassity: 5 years Randal Sutton: 7 years Sharon Province: 18 months Howard Wittner: 3 years David Wulf: 10 years $435 Million in Restitution

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Funeral scam family getting spotlight on 'American Greed'

• https://youtu.be/lXn-MTrklsc

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Lincoln Memorial – The Trial

TRIAL STARTS

• February 2, 2015
• 10 Jurors selected

– 6 needed for verdict / 4 alternates – all unanimous

• February 5, 2015 – Opening

Statements

• Key Witnesses

– Bank Trustee – 4+ days on stand – Several Video Clip testimonies – Defendant had 1 live expert witness

TRIAL ENDS

• March 6, 2015 – Closing

Arguments

– Jury Instructions – 27 points

• March 6, 2015 @ 4:00 p.m. to

Jury

• March 9, 2015
• Jury deliberates from 8:30-

9:45 a.m.

– Jury asks for a “group photo”

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Verdict

• PNC

– Compensatory Damages: $355.5 million – Punitive Damages: $35.5 million – Total: $391 million

• Forever Enterprises

– Compensatory Damages: $100 million

• Appeal Process

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HOUSE OF CARDS COME TUMBLING DOWN

• 1. Early Warnings
• 2. What Went Wrong
• 3. How Long Before Insolvency
• 4. Regulator Action
• 5. Guaranty Association Coverage
• 6. Lessons Learned

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No Two Insolvencies are Alike

Pricing Fraud Untested Model New Company Pandemic?

Liquidation of Insurance Company By Regulators

Subject to State Insurance Laws Supervision / Rehabilitation / Office of Special Deputy Receiver

Guaranty Association Provides Safety Net In times of Insolvency

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