Managing the financial consequences of LTC risks Christophe Courbage

Transcription

1 Managing the financial consequences of LTC risks Christophe Courbage The Geneva Association

2 What is LTC risk? Risk of becoming dependent (functional limitation) and of needing LTC in the future LTC is provided on a daily basis to people suffering from loss of autonomy: Mix of social care (help with daily activities) and health care (nursing care) Informally (family members) or formally (paid staff) At home or in institutions (70% of spending) Increase in LTC expenditure due to: Ageing of the population (40% age 65) Shift from informal care to formal care (monetisation of LTC) Risk that may lead to catastrophic financial risks and can bankrupt many elderly people (as public coverage is rather low) Average LTC cost: Euros for residential care and Euros for home care (France)

3 Proportion of over 80 years old ( ) Source: OECD Labour Force and Demographic database, 2009

4 Source: OECD Age profiles for public expenditure on LTC (2000)

5 Share of the population aged over 80 and spending on LTC (2007) Source: OECD Labour Force and Demographic database, 2009

6 Public coverage Fragmentation across different funding sources (health and social services) Different coverage arrangements for different services Various coverage approaches Universal coverage: recognized as a new risk and dissociated from other health risks (Germany, Luxembourg, Japan, France) Mixed systems (Switzerland, Italy, Poland) Means-tested systems with eligibility criteria (U.S., U.K.) Risk of life versus risk of ageing Partial coverage (30% of total expenditure)

7 Specificities of LTC risk Intertemporal risk that makes its actuarial assessment difficult Healthy and non-healthy life expectancy (state of dependency) Future cost of LTC (technology, medicalisation, monetisation, institutionalisation) Risk correlated (no risk pooling) in time for a same cohort Difficulties in reducing the risk Difficulties in measuring the risk Importance of reserves

8 Private LTC insurance Provides covered benefits if the claimant cannot do two or more of the ADL or suffers severe cognitive impairment in exchange for regular premium Benefits function of the degree of dependency Daily, weekly or monthly benefits Service benefits (reimbursement) versus cash disability benefits Individual and collective contracts Elimination period Guarantee renewable policies Market that strongly depends on institutional settings Different functions: principal, substitute or complement USA: fiscal incentives to promote private LTC insurance (~10% ) Germany: compulsory private LTC insurance (10%) France: rather successful market without fiscal incentives (~6%)

9 Under developped market People are risk averse and should buy LTC insurance On the demande side: Not well-informed about the products available, Wrong aprehension of risk with a long-term horizon (underestimation of LTC risks) Uncertainty about what the state would provide for (crowding out) Very high premiums if bought in later life (as premiums depend on age and uncertainty) Bequest motives vs desincentives to intra-family solidarity On the supply side: Issues of moral hazard (over-consumption encouraged by insurance) Issues of anti-selection (over-representation of high risks) Issues of actuarial assessment and pricing of LTC risk

10 Empirical works on LTC insurance Sloan and Norton (1997), USA Self-probability of becoming dependent: + Will to leave inheritance: 0 Medicaid: - Melor (2001), USA Education, income, wealth: + Informal care availibility: 0 Doerpinghaus and Gustavson (2002), USA Size of elderly population: + Size of nursing home population: + Finkelstein and McGarry (2006), USA Adverse selection: + Ex-post moral hasard: 0 Medicaid:- High loading factor: - Courbage et Roudaut (2008), France Income: bell-shape effect Inheritance, children: + Experience of dependency: + Informal care availability: +

11 Combining LTC insurance and life insurance Pooling of two complementary risks («long-life» vs «short-life with disability») Mitigation of anti-selection since impaired insured persons may not live long enough to benefit from a long-term life annuity Underwriting reduced to filtering out applicants who may be eligible immediately for LTC cover (increasing the number of eligible persons) Single Premium Disabled person dies Person's disability degree increases (to 4 ADL's): Benefit: +1 X standard annuity "unimpaired" person dies Person becomes disabled (2 ADL's): Benefit: +2 X standard annuity standard annuity 11

12 Other insurance tools Impaired Life Annuity (UK, Germany) Person whose life span may be significantly limited by a severe chronic condition Significantly better annuities can be offered to such a person due to the increased mortality rate associated with the condition Critical illness insurance (UK, Asia) Lump sum cover in case of critical illness or dread diseases (Heart attack, stroke, cancer, coma, end-stage liver and kidney diseases, Alzheimers and other dementias, diabetes type 1, chronic Chrohns disease) or total and permanent disablement for other conditions (ADL definitions) Cover extended to age 80 and up to 1,500,000 USD in some countries subject to financial underwriting Asset Liability matching Identifying the periodic liability flows and looking for better investment of the assets to cover them Investing in medical research through foundations Investing in nursing institutions

13 The Eldershield experience - Singapore Public financing system providing incentives to insure early enough From the age of 40, all individuals are automatically enrolled (possibility of refusing) to an insurer. Public subsidies and preferential underwriting conditions The product and its pricing are to be borne by insurers (premium paid until the age of 65 and compensation is for life). Government help to smooth age segmentation and mean-tested benefits The opt-out rate of the plan decreased from 38 per cent in 2002 to 14 per cent in 2006

14 Reverse mortgage A reverse mortgage is a loan secured on the value of a property. Reverse-mortgage converts home equity into cash Most elderly are home owner (without mortgage debt) Allow seniors to tap in the value of their home while protecting their retirement income from the potential catastrophic costs of LTC Can be used to directly fund LTC Could also be used to fund LTC insurance

15 Individual saving Incentives to save in order to pay for either LTC expenses later in life or LTC insurance premium (cost spread over time) Medical saving accounts (Singapour, South Africa, China, U.S.A.) Savings are invested in a special account to cover only health care spending, generally offered in combination with a high deductible insurance. Voluntary participation with financial incentives, or of mandatory contribution with additional contribution from the employer. Swiss second pillar (mandatory occupational pensions system). Based on inter-temporal distribution mechanisms, enables building up reserves for old age and makes it possible to fight against moral hazard Do not enable risk sharing between individuals and depend on the performance of financial markets