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ANATOMY OF AN INSOLVENCY Katie School of Insurance Insurance Financial Regulators June 1, 2020 2
• Kelvin Schill – Past Chair – Illinois Life & Health Insurance Guaranty Association – COUNTRY Life Insurance Company – Senior Vice Starting with a President, Financial Services & Operations Thank You • Janis Potter – Executive Director • Illinois Life & Health Insurance Guaranty Association
Brief Bios Kelvin Schill Janis Potter Kelvin Schill is Senior Vice President of Financial Service Janis Potter is the Executive Director of the Illinois Life Operations at COUNTRY Life Insurance Company. He & Health Insurance Guaranty Association. She provides previously served as vice president of Financial leadership in supporting insolvency, organizational and Products and Chief Actuary of COUNTRY Life Insurance financial plans with the Board of Directors and staff, and Company and COUNTRY Investors Life Assurance carries out plans and policies authorized by the Board. Company and responsible for the design, pricing and She is the primary contact to the Board of Directors and support of financial products. the Executive, Compensation, Nominating, Audit, Finance, Legal and Claims Committees, including the responsibility for oversight of staffing of all committees. Prior to joining COUNTRY, Schill worked with General Electric’s direct insurance business. He held various positions as GE, including valuation actuary, quality Ms. Potter is active in many NOLHGA committees, leader, risk leader, P&L leader, and culminating in including Task Force Chair for a health insolvency. Prior business leader and chief operating officer. Schill is a to joining the Associations, Ms. Potter was Vice Fellow, Society of Actuaries and Member, American President at Mutual Trust Financial Group. Academy of Actuaries. Kelvin is past Chair of the Illinois Life & Health Insurance Guaranty Association. 4
An Insolvency Unfolds 5
Understanding the Insolvency Process 6
What are Capital Standards for Insurers? Capital Standards Refers to the Requirements Vary Depending Rules That the Insurance on the Line of Business – Commissioners Have for Taking Into Account the Nature Making Sure That an Insurer of the Assets, Liabilities and Has Enough Money Available Underwriting Risks of the to Pay Claims When Made Company 7
Why do Capital Standards Exist? All 50 States Have Adopted the NAIC’s Risk Based RBC Requirements are Capital (RBC) Framework Calculated On a Legal for Establishing Capital Entity Basis Standards 8
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.” 9
Our Mission to Illinois Policyholders: To protect policyholders and their beneficiaries in the payment of 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. 10
How Does Guaranty System Provide Policyholder Protection? The Guaranty System serves as a Safety Net for policyholders of 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 11
Order of Rehabilitation or Liquidation received How an Insolvency Association’s role is to pay benefits up to statutory limit Works Assessments made to member organizations to settle policy and coverage obligations 12
Life Insurance • $300,000 death benefit • $100,000 cash surrender value Health Insurance • $500,000 major medical What are the • $300,000 disability insurance • $300,000 long-term care • $100,000 other health insurance Statutory Annuity • $250,000 in present value Limits? 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 13
Insolvencies ------------------------- - NO TWO THE SAME Penn Treaty – Long Term Care Lincoln Memorial – Life Insurance K. Schill & J. Potter -------------------------------------------- 14
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%) 15
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 16
Long Term Care Policyholders • Old people slide 17
LONG TERM CARE PENN TREATY 18
Initial actuarial assumptions were wrong Lapse and mortality Emergence of assisted Interest rates rates living facilities Penn Treaty Inflation riders tremendously underpriced at (Policies younger issue ages Underpriced) Sufficient rate increases not sought/obtained 19
Penn Treaty – Overview for Illinois as of March 1, 2017 Anticipated Claims Anticipated Total number of Payments - ~$115 Premium - ~$32 policies – 3,434 million* million* Total Anticipated Liabilities (Before Estate Assets - *present value Estate Assets) - ~ ~$7.3 million $92 million* 20
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 21
WHAT’S AHEAD ON THE INSOLVENCY HORIZON 22
Rehabilitation Date – January 29, 2020 Rehabilitation Plan Filing – April 22, 2020 23
• $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 24
Data as of January 31, 2020 Total Illinois In-Force Business • Policy Count 2,069 47,260 • On Claim 269 6,002 • Premium $5,172,429 $88,803,213 • Annual Premium Per Policy $2,500 $1,879 • Current Daily Benefit $171 $172 • Average Historical Rate Increase 150% 91% • Distribution by Policy Count 4% 100% 25
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Lincoln Memorial Life Insurance Company (licensed in 35 States) 27
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 28
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 29
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 30
Civil Suit Was Stayed-- Criminal Indictments • 6 with Felony Sentences Douglas Cassity: 9 years 7 months Brent Cassity: 5 years Randal Sutton: 7 years • Serving 18 to Sharon Province: 18 months 115 months Howard Wittner: 3 years David Wulf: 10 years $435 Million in Restitution 31
Funeral scam family getting spotlight on 'American Greed' • https://youtu.be/lXn-MTrklsc 32
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Lincoln Memorial – The Trial TRIAL STARTS TRIAL ENDS • February 2, 2015 • March 6, 2015 – Closing • 10 Jurors selected Arguments – 6 needed for verdict / 4 – Jury Instructions – 27 points alternates – all unanimous • March 6, 2015 @ 4:00 p.m. to • February 5, 2015 – Opening Jury Statements • March 9, 2015 • Key Witnesses • Jury deliberates from 8:30- – Bank Trustee – 4+ days on stand 9:45 a.m. – Several Video Clip testimonies – Jury asks for a “group photo” – Defendant had 1 live expert witness 34
Verdict • PNC – Compensatory Damages: $355.5 million – Punitive Damages: $35.5 million – Total: $391 million • Forever Enterprises – Compensatory Damages: $100 million • Appeal Process 35
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 36
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Guaranty Association Provides Safety Net In times of Insolvency Liquidation of Insurance Company By Regulators Supervision / Rehabilitation / Office of Special Subject to State Insurance Laws Deputy Receiver No Two Insolvencies are Alike Pricing Fraud Untested Model New Company Pandemic? 38
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