Product pricing and solvency capital requirements for long-term care insurance

Abstract

This paper presents a comprehensive assessment of premiums, reserves and solvency capital requirements (SCRs) for long-term care (LTC) insurance policies using Activities of Daily Living and US data. We compare stand-alone policies, whole life insurance policies with LTC benefit riders (LTC insurance combined with whole life insurance), life care annuities (LTC insurance combined with annuities) and shared LTC insurance in terms of net premium cost and SCRs. Net premiums and best-estimate reserves for base LTC insurance policies are determined using Thiele’s differential equation. Product features such as the elimination period and the maximum benefit period are compared using a simulation-based model. We show how a maximum benefit period can reduce costs and risks for LTC insurance products. SCRs for longevity risk and disability risk are based on the Solvency II standard formula. We quantify the extent to which whole life insurance policies with LTC benefit riders and life care annuities provide lower SCRs than stand-alone LTC insurance policies.

Keywords:

• activities of daily livings
• Solvency II
• longevity risk
• disability risk

Acknowledgements

The authors would like to thank anonymous referees whose comments have been extremely helpful to improve an earlier version of this paper. We are also grateful to Dr Ralph Stevens and Professor Bernard Wong for their valuable suggestions. The financial support of the Australian Research Council Centre of Excellence in Population Ageing Research [project number CE110001029] is highly acknowledged.

Notes

No potential conflict of interest was reported by the authors.

1 Typical private LTC insurance, particularly in North America, pays a benefit when the insured has difficulties with either 2+ or 3+ ADLs. This paper uses 3+ ADLs as a base and shows the effect of 2+ ADLs in a sensitivity analysis in Table 9.

2 For some types of LTC insurance policies, only lump sum premiums are taken into account since periodic or continuous premiums are not feasible, e.g. policies sold to individuals who are already severely disabled and life care annuities.

3 The discrepancy between premiums of life insurance policies with LTC benefit riders that are charged to males and females becomes larger when the death benefit is increased due to higher mortality rates of males.

4 In calculating the aggregate SCRs for life insurance policies with LTC benefit riders and for life care annuities, negative values of the risk-specific SCRs are set to zero.