Should You Accept a Genworth Long Term Care Insurance Class Action Settlement Offer
Should You Accept a Genworth Long Term Care Insurance Class Action Settlement Offer?
By John H. Robinson, Fee-Only Financial Planner (1/8/2023)
Genworth History: The Backstory to the Genworth LTC Mess (h2) (KD: 0/100, Vol.: 10/month)
Beginning in the 1990s, life insurance companies began to view the Baby Boomer generation as a marketing opportunity for a new form of insurance that would help retiring consumers address the potential financial risk posed by age-related custodial care expenses. While earlier versions of long-term care insurance existed in the 1980s, most of these policies were gimmicky and contained provisions that made it difficult for purchasers to qualify for benefits.
By the mid-1990s, the first wave of baby boomers was within 15 years of Social Security full retirement age. The Boomer generation was known for their conservative saving practices and diligent retirement planning. The size of this market and the potential demand led more than 100 insurance companies to issue long term care insurance policies by the early 2000s and competition among them led to both reductions in premiums and more consumer-friendly product designs.
What is the Relationship Between Genworth Life Insurance & GE Capital Assurance? (h2) (KD: 0/100, Vol.: 10/month)
During this period, GE Capital Assurance, then a division of General Electric Corporation, acquired a number of life insurance companies and used its financial strength at the time to create an extremely competitive suite of long-term care insurance products that enabled it to become the dominant carrier. GE Capital Assurance was rebranded as Genworth Financial and spun off from GE in an IPO in 2004.
Interestingly, sales of traditional long term care insurance policies peaked in 2000 with a total of 700,000 policies issued across all carriers. By 2005 issuance had fallen to 350,000 new policies. In 2020, just 49,000 new traditional LTC policies were issued and the total number of carriers selling in the market had dwindled to less than a dozen!
What Caused the Implosion of the LTC Insurance Marketplace and, specifically Genworth?
The factors that caused so many carriers to discontinue policy issuance and exit the LTC insurance space can be boiled down to two factors - actuarial mispricing and overzealous marketing. Both seem difficult to fathom. Nearly all the carriers who discontinued sales of LTC policies cite that they simply did not expect the healthcare costs to rise so much or that so many policyholders would file claims, yet the marketing literature the carriers gave to prospective policyholders listed the rising cost of custodial care and a 1-in-3 likelihood of needing care as reasons to buy. With respect to persistency, the actuaries foolishly assumed that the lapse ratios on LTC policies would be similar to those on life insurance policies since discovered that LTC policyholders are far less likely to drop their policies than life insurance policyholders. In fact, the longer they have paid premiums, the more likely they are to continue the policies.
The actuaries also did not foresee that interest rates on bonds would fall to historic lows from 2000-2021. Since insurance companies earn profits by investing policyholders’ premiums in bonds, failing to account for low returns was a major body blow to LTC carriers. Price competition in the war to win market share provided the knockout punch to market leader Genworth (18% market share at its peak).
Premium increases on new policies began in the mid-2000s and undoubtedly contributed to quelling consumer demand. Even if demand had remained strong, the premium increases were too little, too late to save Genworth from an existential financial crisis.
The Class Action Lawsuit Against Genworth Long-Term Care Saga… (h2) (KD: 9/100, Vol.: 400/month)
Policyholder claims began pouring in in the 2010s leading to several years of billions of dollars of losses in Genworth’s Long Term Care Insurance Division. Genworth had two tools with which to maintain solvency – increase premiums and encourage existing policyholders to voluntarily reduce their benefits. The magnitude of the losses and the potentially dire consequences Genworth’s insolvency might have on the state’s insurance guaranty funds caused most state insurance commissioners to effectively rubberstamp approval of nearly all requested increases.
This led to a spate of class action lawsuits. The first wave of lawsuits challenged Genworth’s right to increase premiums. Attorneys on the behalf of policyholders argued that sales pitches by insurance agents implied to consumers that the premiums would remain level and that, while the contract allowed for potential future premium increases, the likelihood and magnitude of such increases were small. However, because the contracts did, in fact, allow for premium increases without specifying any limitation, Genworth successfully fended off these attacks and steadfastly rejected offers to settle.
The now famous Skochin, et al. v. Genworth class action suit took a different tact. In this case, the attorneys did not contest Genworth’s legal right to raise premiums but instead argued that Genworth withheld important information about the need for future premium increases that might have caused policyholders to make different decisions about maintaining their policies if that information had been disclosed when the first rounds of premium increases were announced.
Instead of fighting this claim in court, Genworth, for the first time, agreed to settle. The terms of the settlement required Genworth to offer eligible class members a cash refund of a portion of the premiums they paid or a partial refund paired with a small paid-up policy. Since, Skochin v. Genworth, Genworth has opted to settle other similar lawsuits including Halcom, et al. v. Genworth (filed by the same attorneys that represented the Skochin class) and Haney, et al. v. Genworth.
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Should Genworth LTC Policy Holders Express Gratitude to the Attorneys?
The initial response of some policyholders upon receipt of the Skochin V. Genworth Settlement offers was a sense of satisfaction that the bullying insurance company was at least being forced to provide some compensation to the policyholders it had victimized. A closer examination of the settlement terms, however, reveals that the settlement was far from the second coming of Erin Brockovich.
In fact, Genworth’s strategic shift in its legal defense strategy may be viewed as a stroke of brilliance. Not only did it allow Genworth to avoid future costly litigation, but the settlement offers encouraged policyholders with high-risk contract provisions (from Genworth’s perspective) to opt out of their policies, thereby enabling Genworth to avoid billions of dollars in expected future claims.
As for the attorneys, their role seems far from altruistic. The settlement terms of Skochin v. Genworth required Genworth to pay $2,000,000 in attorney’s fees plus a 15% contingent payment (commission) tied to the value of the settlements paid to class members who accept the settlement offer with a minimum payment of $10,000,000 and a maximum of $24,500,000. The terms are similar to the Halcom v. Genworth case as well.
Both of these outcomes seem considerably better than the settlement offer terms extended to the class member policyholders. As Genworth CFO Daniel Sheehan stated in a presentation to securities analysts in November 2022, “We believe that, overall, the settlements are favorable to both the policyholders and Genworth, and will reduce our tail risk on our LTC block.”
Genworth Long-Term Care Settlement Options: Should You Accept Them? (h2) (KD: 12/100, Vol.: 400/month)
The inconvenient truth in the wake of the class action settlements is that the settlement offers align the law firms’ interests with those of Genworth. The settlement offers are akin to a non-forfeiture option – a standard LTC policy feature that inures some nominal benefits to the policy owner if the policy voluntarily lapses. It is in Genworth’s interest to get many of its existing policies off its books and it is in the attorneys’ interests for Genworth to steer policyholders to the settlement offers instead of highlighting other potential policy restructuring options that might be better for the policyholders.
In my opinion, policyholders should indeed look Genworth’s proverbial “gift horse” in the mouth. Existing policyholders should be reticent to accept the settlement offers without first considering the many other restructuring options that may be available to them. Over the past few years, I have developed a mini cottage industry out of helping consumers understand these options.
What Happens if Genworth Long-Term Care Goes Bankrupt? (h2) (KD: 0/100, Vol.: 10/month)
I addressed the possibility of Genworth’s bankruptcy in an article I wrote for Hawaii Reporter in 2022, What if the company that Issued My LTC Policy Fails?. In the article, I advised consumers to be aware of their state’s insurance guarantee limits for long term care policies and to consider reducing the total benefits limits in their policies to be near the state’s limits.
That said, it seems increasingly likely that the cumulative effect of premium increases, settlements, and non-forfeiture elections has enabled Genworth to turn the financial corner. No longer is the company reporting billions or even millions in losses on its long-term care insurance business. In fact, in Q3 2022, Genworth LTC posted $25 million in net income. In Q3 2021, it posted $139 million in profits.
To date, Genworth says it has paid claims on more than 330,000 of the 1.25 million policies it has issued. As of the 2022 year-end, Genworth stated that it had 999,000 policies still in force (it stopped issuing new policies in 2016) and was paying claims on 47,739 policies.
Readers of this article may also wish to read my original post - The Genworth LTC Mess (5/22/2020)
John H. Robinson is the owner/founder of Financial Planning Hawaii, Fee-Only Planning Hawaii, and Paraplanning Hawaii. He is also a co-founder of fintech software-maker Nest Egg Guru.
SUPPORTING ARTICLES
Miscalculated Risk: The Old Age Bill that’s Crushing Genworth (Bloomberg News, 3/6/2015)
Here's an uncomfortable question: who's going to pay for mom or dad's nursing home bill — or yours, for that matter? The answer, for about 1.2 million Americans, is Tom McInerney. McInerney, 58, is the chief executive officer of Genworth Financial Inc., the beleaguered giant of long-term care insurance. McInerney is in a tight spot, and it's getting tighter. Long-term care policies written in past decades have turned into a black hole for the insurance industry. Executives misjudged everything from how much elder care would cost to how long people would live. Result: these policies are costing insurers billions.
Genworth is struggling to contain the damage and on Monday warned of a "material weakness" in some of its accounting. To cope with mounting costs on the policies, Genworth has been raising premiums again and again. Some policyholders are furious.
Another Shock to the Long-Term Care Insurance Industry (Forbes, 4/1/2019)
Sales of traditional policies have declined by more than 90 percent over the past decade and fewer than a dozen carriers still are selling the product.
In February, Genworth took an additional $327 million fourth-quarter pre-tax charge to boost the reserves it will need to pay future LTC insurance claims. It was just the latest in billions of dollars in reserves it has added in recent years. At the same time, the carrier is continuing its efforts to convince state insurance regulators to allow it to impose annual, small premium increases on policyholders, much like health insurance, rather than less frequent but much bigger premium hikes that are the standard for long-term care policies.
Last month, GE, which still has about 274,000 legacy long-term care policies it sold before spinning off the Genworth unit in 2003, announced it would request $1.7 billion in premium increases through 2029.
LTC insurance industry is imploding as new numbers show a chasm in costs for private plans (1/8/2019)
The Pittsburgh Post-Gazette reported Monday that Virginia-based Genworth has lost about $3.1 billion from its long-term care policies, and has asked state agencies for approval to raise rates an average of 53%.
Beyond Genworth, the market for long-term care insurance market has dwindled in recent years. About 100 companies offered standalone policies in 2002 nationwide, which has dropped to 17 today.
“The industry has been imploding because they sold a ton of policies and they mispriced them,” Richard Sabo, principal of RPS Financial Solutions, told the Gazette. “They have a financial mess.”
Another Class Action Lawsuit Against Genworth (The Insurance Forum, 9/24/2021)
In the notice to class members, there is a section on attorneys' fees and litigation expenses. It says the class attorneys (the same attorneys who filed the Skochin complaint mentioned later), as part of the request for final approval of the settlement, will request (a) $1 million relating to the injunctive relief that is in the form of the disclosures, and (b) an additional contingent payment of 15 percent of certain amounts related to the class members' selection of options, but no greater than $18,500,000. None of the attorneys' fees will be deducted from the payments made to class members. Also, the class attorneys will request an award of litigation expenses of no more than $50,000. Genworth has agreed to pay all fees and expenses. The class attorneys will also request approval of payment of up to $15,000 for each of the four named plaintiffs.
Genworth Executives Review Long-Term Care Rate Hike Settlements (Think Advisor, 11/3/2022)
Genworth Financial executives talked to securities analysts Wednesday about new and pending lawsuit settlements related to long-term care insurance premium increases. Daniel Sheehan, the Richmond, Virginia-based insurer’s chief financial officer, told the analysts that Genworth has already implemented one of the settlements. “We believe that, overall, the settlements are favorable to both the policyholders and Genworth, and will reduce our tail risk on our LTC block,” Sheehan said.
Genworth came to life in 2004, as the company that inherited most of General Electric’s life insurance, annuity, and mortgage insurance operations. It was one of the creators of the modern U.S. long-term care insurance market. Many of the assumptions Genworth and its competitors used to design and price long-term care insurance policies were wrong, and it has spent years trying to get the regulatory approvals needed to increase the premiums enough to keep the life insurance company unit responsible for paying the claims solvent.
The life unit still has about 999,000 long-term care insurance policies in force. It’s generating $2.6 billion in long-term care insurance premiums per year and is paying 47,739 long-term care insurance claims, according to an earnings summary Genworth released earlier this week.
As of the third quarter, for example, 55% of the affected policyholders were paying the full premiums, 27% had accepted reduced benefit options, and 17% had accepted non-forfeiture options.
The American Associaion for Long-Term Care Insurance -2021 Facts, Data, & Statistics
John H. Robinson is the owner/founder of Financial Planning Hawaii, Fee-Only Planning Hawaii, and Paraplanning Hawaii. He is also a co-founder of fintech software-maker Nest Egg Guru.
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