A pair of small Pennsylvania insurers focused on long-term care could soon become one of the nation’s costliest insurance failures ever, highlighting the widespread problems that have plagued the industry niche for more than 10 years.

According to state court filings in Harrisburg, two insurance units of Penn Treaty American Corp., which have combined assets of about $600 million and projected long-term-care claims liabilities exceeding $4 billion, are expected to be liquidated early next year. This likely would be the second-largest life-health-insurance insolvency in U. S. history by assessments (the amount other insurers are required under state laws to pay to cover policyholders of a defunct firm.)

Since the 1990s through the early 2000s long-term-care policies were sold by dozens of insurers who believed this new product would be very attractive to aging middle-class Americans worried about paying for health care expenses in their later years that weren’t covered by Medicare. The federal-state Medicaid program—available only to the poor—does pay for nursing homes.

The downfall is that most actuaries severely underestimated costs and state insurance departments brought steep resistance to insurers who tried to recover costs through steep rate increases to policyholders.

In 2009 Pennsylvania regulators sought to liquidate the two insurers as there problems worsened, but the companies resisted in favor of rate increases. Penn Treaty “is pleased that years of litigation have successfully concluded,” said Douglas Christian, a partner with Ballard Spahr LLP, who represents the company.

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