>>when the insurance companies (LTC or otherwise) run into trouble, they may go bankrupt, lower payouts, or possibly return the premiums of supposedly insured people and consider that as a satisfaction of all obligations.>>
Let's not confuse deregulation of banks with the heavily regulated insurance industry. A lot of people do this, and it's understandable, but they are two very different "beasts".
1) Go bankrupt: Hartford Life came close during the market chaos in 2008, but 'bankrupt' for insurers is not quite the same as bankrupt pension funds or corporations. You might already know this, but I'll outline it below in general, for those who aren't familiar with how insurance is funded/regulated.
As has been pointed out on this board in another thread, premiums are not what pay claims. It's investments that are used to pay claims. Every policy sold MUST have a cash reserve percentage set aside in liquid instruments. States manage the guaranty funds which are used to repay policyholders IF a liquidated company's assets (RE, investments, and the cash reserves) are insufficient to cover claims on the different lines of business the insurer was in.
I can only recall two insurers (non-LTC) which have been liquidated in recent (regulated) US history: MONY and Equity Benefit Life. In MONY's case, policyholders were paid lump sums calculated at PVFP (Present Value of Future Profits). My FIL, a worker at Mead Paper, received such a lump sum in lieu of an expected annuity, when Mead went under and then MONY was liquidated a few years later.
In EBL's case, it was caused by fraud, not against policyholders, but against reinsurers, one of the first big B2B fraud cases. Legitimate policyholders had their policies transferred to another insurer willing to buy the business, and no financial losses were suffered by any consumers.
2) Return of premiums: It's possible, but not usually done. I've never heard of it being done, but perhaps you have; I haven't paid close attention to this specific issue. Usually what happens is that the insurer simply "closes" the book of business, similar to the way a fund will "close" to new investors. Because 80% of costs are incurred on booking new business, eliminating new applicants is the preferred method of eliminating a profit drain, on ANY book of business, LTC or non-LTC.
Met Life, for example, in withdrawing from the LTC market in 2010, merely stopped writing any new LTC. All current LTC policies remain in force with original benefits, with no changes.
Of course, this doesn't prevent class-wide premium increases, which must be approved by the State Dept. of Insurance commissioner, in the state in which the insurer is doing business. That's why I pointed out that back in 1999, I thought the old actuarial tables were flawed when it came to the Boomer generation, and that I expected price increases. But because we bought LTCi before "conventional wisdom" suggested, our premiums were very affordable then, and remain affordable still.
We also have one advantage I didn't mention above. Our LTCi was sponsored at the time by our state pension fund. Once the IRS approved Partnership LTCi, the 'book of business' our policy is under, was closed to new applicants. The LTC insurer is a "captive" insurer: they cannot withdraw from supporting the closed book of policies unless the pension fund can find a replacement insurer. It isn't a large number of LTCi –less than 20,000 policies total.
3) Reduce payout. Didn't mean to take these out of order! I realized that the Pennsylvania Dept. of Insurance settlement with Conseco applies here. Conseco sold LTCi under six different subs. All had very high #s of complaints against them. The settlement (which took years to negotiate) has all LTCi policies with Conseco/subs aggregated and paid from an independent trust funded by Conseco.
Whether the $215M that funds the trust is sufficient to cover the 14,000 policies – no one can be sure about that. From an actuarial standard, not all policyholders will file claims, and of those that do, it's a guess as to how long benefits will need to be paid. We also don't know how many of those policies were for set periods (3 yr, 5 yr, etc.) or for unlimited periods.