Pa. insurer suffers epic collapse, public on hook for billions

The Pennsylvania Insurance Department on Wednesday announced the liquidation of two Pennsylvania-based insurers which cover about 76,000 people in Pennsylvania and other states.

The projected claims of people covered by Penn Treaty Network America Insurance Co. and affiliate American Network Insurance Co. would reach $4.6 billion, according to Philly.com.

Customers of those two insurers won't lose out -- their bills will be covered by a state guaranty fund that will be funded largely by a 2 percent annual surcharge on other U.S. health insurers, with the cost ultimately shifted to their customers, Philly.com reported. The guaranty fund is expected to cover about $3.3 billion, with the remainder covered by customers of the two liquidated insurers, who will continue paying premiums.

Most of the coverage provided by Penn Treaty and its affiliate involves long-term care. Their failure is attributed to incorrect calculations regarding what they would eventually have to pay out to people covered by their polices.

While customer claims will be covered up to the maximum amount of their policy, claims are subject to a $300,000 cap in the guaranty fund.

The liquidation was approved by Commonwealth Court after an eight-year effort to try to rehabilitate Penn Treaty and its affiliate. It was eventually decided that the premium increases needed to make the insurers solvent would "severely harm policyholders" and would be beyond the amount the insurance department would approve.

A news release from the insurance department said in part, "Over the past several years, long term care insurance has posed significant challenges to insurers on a national level. The pricing of these policies for many insurance companies has proved to be insufficient as a result of claims greatly exceeding expectations and low investment returns. Claims have exceeded expectations due to incorrect assumptions concerning the number of policyholders who would drop their coverage and the number of policyholders who would utilize their policy benefits, as well as the cost of providing those benefits. The pricing deficiencies and resulting financial losses have resulted in many long term care insurers seeking large premium rate increases and some leaving the market."