LONG-TERM CARE INSURANCE PRODUCTS: A SURVEY

Transcription

1 1/54 p. 1/54 LONG-TERM CARE INSURANCE PRODUCTS: A SURVEY Ermanno Pitacco University of Trieste ermanno.pitacco@econ.units.it

2 Agenda 1. Motivation 2. LTCI in the framework of health insurance 3. Measuring the severity of disability 4. Fixed-amount and degree-related benefits 5. Expense-related benefits and service benefits 6. Actuarial models for LTCI: an introduction 7. LTCI: some numerical results 8. Longevity risk issues 2/54 p. 2/54

3 1 MOTIVATION Long-Term Care Insurance (LTCI) financial support to the insured, while he/she needs nursing and/or medical care because of chronic (or long-lasting) conditions or ailments Several types of benefits can be provided, in particular: fixed amount annuities care expense reimbursement Stand-alone LTC covers high-premium, risk products (no guaranteed benefit at some given maturity, as a result of financial accumulation) Barriers on the supply side: scarcity of data significant insurer s exposure to pricing and reserving risk high premiums needed to be on the safe side (and capital absorption as well) the demand side: weak propensity to purchase risk products at high prices 3/54 p. 3/54

4 Motivation (cont d) Combining LTC benefits with lifetime-related benefits pensions & life annuities whole-life assurance more interesting products in the area of the insurances of the person, from both insurer s perspective: combining benefits cushion reserves to face uncertainty risks insured s perspective: more attractive products if some benefit certainty is provided 4/54 p. 4/54

5 2 LTCI IN THE FRAMEWORK OF HEALTH INSURANCE General aspects Health insurance: a large set of insurance products providing benefits in the case of need arising from accident illness and leading to loss of income (partial or total, permanent or non-permanent) expenses (hospitalization, medical and surgery expenses, nursery, etc.) Health insurance belongs to the area of the insurances of the person (see following Figure; shaded boxes protection) See, for example: Black and Skipper [2000], and references therein 5/54 p. 5/54

6 LTCI in the framework of health insurance (cont d) Insurances of the person Life insurance Life annuities Health insurance Other insurances of the person Pure endowment insurance Endowment insurance Whole-life insurance Term insurance Sickness insurance Accident insurance Income Protection Critical Illness ins. LTC insurance Insurances of the person: basic products 6/54 p. 6/54

7 LTCI in the framework of health insurance (cont d) Types of benefits in the health insurance area Reimbursement benefit: to meet (totally or partially) health costs, e.g. medical expenses expense-related benefits Predefined benefits: amounts stated at policy issue, e.g. to provide an income when the insured is prevented by sickness or injury from working annuity lump sum possibly degree-related benefits (or graded benefits), i.e. linked to the severity of the health status expressed by some degree, e.g. degree of disability Service benefit: care service, e.g. hospital, CCRC (Continuing Care Retirement Communities), etc. 7/54 p. 7/54

8 LTCI in the framework of health insurance (cont d) LTCI benefits LTCI products can be designed to provide (a) reimbursement benefits (b) predefined benefits usually lifelong annuity with degree-related benefit (c) service benefits LTCI products and related benefits are described, for example, in: American Academy of Actuaries [1999], Dullaway and Elliott [1998], Gatenby [1991], Jones [2004], Whynes [1996], Zweifel [1996] Benefit (b) very common need for assessing the degree of disability 8/54 p. 8/54

9 3 MEASURING THE SEVERITY OF DISABILITY According to ADL (Activities of Daily Living) method, the following activities and functions are, for example, considered: 1. eating 2. bathing 3. dressing 4. moving around 5. going to the toilet 6. bowels and bladder Simplest implementation: for each activity or function, individual ability is tested Total disability level (or score) given by the number of activities or functions the insured is not able to perform finally expressed in terms of LTC state See following Table 9/54 p. 9/54

10 Measuring the severity of disability (cont d) ADL score; unable to perform: LTC state Graded benefit (% of the insured benefit) 3 activities I 40 4 or 5 activities II 70 6 activities III 100 Benefit depending on LTC state More complex implementations of ADL method degrees of ability to perform the various activities IADL (Instrumental Activities of Daily Living) method (or PADL, Performance Activities of Daily Living method): based on the individual ability to perform relation activities; for example: ability to use telephone, shopping, food preparation, housekeeping, etc. 10/54 p. 10/54

11 Measuring the severity of disability (cont d) Barthel index and OPCS index: two important examples of methods for assessing the disability severity Example OPCS index: based on the degree of functional dependence in performing 13 activities (mobility, eating, drinking, etc.) Index quantifying the overall disability of a generic individual calculated according to the following procedure: 1. degree p j assessed for each activity j, j = 1,2,..., let p (1), p (2), p (3) denote the three highest values among the p j s (p (1) p (2) p (3) ) 3. overall degree, p, determined as follows (a weighting formula): p = p (1) p (2) p (3) 4. value of p category and level of disability (used in various statistical reports); see following Table 11/54 p. 11/54

12 Measuring the severity of disability (cont d) p Category Level I I I II II The OPCS scale 12/54 p. 12/54

13 Measuring the severity of disability (cont d) Remark Weak point of disability assessment via ADL (or IADL): possible significant correlation among individual ability to perform the various activities likely concentration of insureds in the extreme classes, i.e. those with very low and very high disability level respectively Bibliographic references for assessment of disability degree: Lawton and Brody [1969], Martin and Elliot [1992], McDowell [2006] 13/54 p. 13/54

14 4 FIXED-AMOUNT AND DEGREE-RELATED BENEFITS Classification: see following Figure Immediate care plans, or care annuities: relate to individuals already affected by disability (i.e. in point of need ); consist of: payment of single premium immediate life annuity, possibly degree-related Premium calculation based on assumptions of short life expectancy Remark Care annuities belong to the class of special-rate annuities (or underwritten annuities) Other special-rate annuities: Enhanced annuity income to a person with slightly reduced life expectancy, viz because of personal history of medical conditions Impaired-life annuity higher income than enhanced annuity, as a result of medical conditions which significantly shorten life expectancy (e.g. diabetes, chronic asthma, cancer, etc.) 14/54 p. 14/54

15 Fixed-amount and degree-related benefits (cont d) T. Weinert (2006), Enhanced annuities on the move, Hannover Re's Perspectives. Current topics of international life insurance, Issue No 13 See: Ainslie [2000] 15/54 p. 15/54

16 Fixed-amount and degree-related benefits (cont d) LTC Insurance predefined benefits Immediate care plans ("point-of-need" plans) Pre-funded plans Care annuities Combined products Stand alone LTC + lifetimerelated benefits Life care pensions LTC rider to a whole-life assurance IP + LTC Enhanced pension LTCI products providing predefined benefits 16/54 p. 16/54

17 Fixed-amount and degree-related benefits (cont d) Pre-funded plans consist of: accumulation phase periodic premiums payment (can degenerate in a single premium) payout period LTC benefits payment in the case of LTC need (usually a life annuity) Several products within the class of pre-funded plans Stand-alone LTC cover annuity benefit, possibly graded according to ADL or IADL score Can be financed by a single premium, by temporary periodic premiums, or lifelong periodic premiums Premiums are waived in the case of LTC claim No LTC need no benefit paid risk product 17/54 p. 17/54

18 Fixed-amount and degree-related benefits (cont d) Combined products Mainly aiming at reducing the relative weight of the risk component by introducing a saving component, or by adding the LTC benefits to an insurance product with an important saving component. Some examples follow LTC benefits as a rider to a whole-life assurance policy For example: monthly benefit of 2% of the sum assured is paid in the case of LTC claim, for 50 months at most death benefit consequently reduced, and disappears if all the 50 monthly benefits are paid (Temporary) LTC annuity benefit = acceleration of death benefit LTC cover can be complemented by an additional deferred LTC annuity (financed by appropriate premium increase) starting after possible exhaustion of the sum assured Example: see following Figure 18/54 p. 18/54

19 Fixed-amount and degree-related benefits (cont d) lump sum no LTC claim x age at death temporary LTC annuity with LTC claim x age at LTC claim exhaustion of the sum age at death temporary LTC annuity additional LTC annuity with LTC claim x age at LTC claim exhaustion of the sum age at death residual lump sum temporary LTC annuity with LTC claim x age at LTC claim age at death LTCI as an acceleration benefit in a whole-life assurance: possible outcomes 19/54 p. 19/54

20 Fixed-amount and degree-related benefits (cont d) Insurance package including LTC benefits combined with lifetime-related benefits LTC + benefits only depending on survival and death 1. a lifelong LTC annuity (from the LTC claim on) 2. a deferred life annuity (e.g. from age 80), while the insured is not in LTC disability state 3. a lump sum benefit on death, which can alternatively be given by (a) a fixed amount, stated in the policy (b) the difference (if positive) between a stated amount and the amount paid as benefit 1 and/or benefit 2 Example: see following Figure 20/54 p. 20/54

21 Fixed-amount and degree-related benefits (cont d) (possible) lump sum annuity no LTC claim x 80 age at death lump sum no LTC claim x age at 80 death (possible) lump sum annuity LTC annuity with LTC claim x 80 age at LTC claim age at death (possible) lump sum LTC annuity with LTC claim x age at 80 LTC claim age at death Package including LTC annuity and lifetime-related benefits: possible outcomes 21/54 p. 21/54

22 Fixed-amount and degree-related benefits (cont d) Lifelong disability cover Income Protection cover during the working period, that is, during the accumulation period related to LTC benefits + LTC cover during the retirement period Life care pensions (or life care annuities) Life annuity products with LTC benefit defined in terms of uplift with respect to basic pension Basic pension b paid out from retirement onwards, replaced by benefit b (i) (b (i) > b) in case of LTC claim Uplift can be financed during the whole accumulation period by premiums higher than those needed to purchase the basic pension b by a reduced benefit b (a) paid while the policyholder is healthy enhanced pension 22/54 p. 22/54

23 Fixed-amount and degree-related benefits (cont d) b (i) basic pension LTC benefit b time retirement LTC claim Benefits provided by a life care pension product 23/54 p. 23/54

24 Fixed-amount and degree-related benefits (cont d) b (i) basic pension LTC benefit = enhanced pension b b (a) time retirement LTC claim Benefits provided by an enhanced pension product See: Murtaugh et al. [2001], Pitacco [2013], Warshawsky [2007], Zhou-Richter and Gründl [2011] 24/54 p. 24/54

25 Fixed-amount and degree-related benefits (cont d) Remark Combined insurance products in the area of health insurance insurer s perspective a combined product can result profitable even if one of its components is not profitable client s perspective purchasing a combined product can be less expensive than purchasing each single component (reduction of acquisition costs charged to the policyholder) In particular health covers as riders to life insurance health covers in insurance packages See examples in following Figure 25/54 p. 25/54

26 Fixed-amount and degree-related benefits (cont d) Insurances of the person Life insurance Life annuities Health insurance Other insurances of the person Pure endowment insurance Sickness insurance Endowment insurance 5 Accident insurance Income Protection 6 Whole-life insurance Critical Illness ins. 4 Term insurance 3 LTC insurance 2 1 Combining health and life benefits 26/54 p. 26/54

27 5 EXPENSE-RELATED BENEFITS AND SERVICE BENEFITS LTCI products providing expense reimbursement Two basic types of products Stand-alone LTC cover Benefits consist in (partial) reimbursement of expenses related to LTC needs (nursery, medical expenses, physiotherapy, etc.) Usually, limitations on eligible expenses; further, deductible as well as maximum amount stated in the policy conditions LTC cover as a rider to sickness insurance Resulting product: lifelong sickness insurance To cover LTC needs eligible expenses extended, to include e.g. nursing home expenses Fixed-amount daily benefit can be provided for expenses without document evidence 27/54 p. 27/54

28 Expense-related benefits and service benefits (cont d) LTCI products providing care service benefits usually relying on agreement between insurance company and institution which acts as the care provider Interesting alternative Continuing Care Retirement Communities (CCRCs) established in the US CCRCs offer housing and a range of other services, including long-term care Costs usually met by a combination of entrance charge (upfront premium) plus periodic fees (monthly premiums) See: Brecht et al. [2009], Winklevoss and Powell [1984] 28/54 p. 28/54

29 6 ACTUARIAL MODELS FOR LTCI: AN INTRODUCTION Disability degree expressed in terms of a (small) number of disability states (say, 2 to 4) multistate structure, similar to those adopted in disability insurance (Income Protection in particular) See following Figure (a) Need to estimate probabilities related to all the possible transitions Reasonable simplifying assumptions usually adopted: disregard recovery and improvement possibilities, because of the likely chronical character of disability See following Figure (b) Note: LTC benefits are living benefits (like standard life annuities) mortality of disabled people should not be overestimated 29/54 p. 29/54

30 Actuarial models for LTCI: an introduction (cont d) a i' i'' a i' i'' d d (a) Four-state models for LTC (b) References on actuarial models for LTCI: American Academy of Actuaries [1999], Dullaway and Elliott [1998], Haberman and Pitacco [1999], Gatenby [1991], Pitacco [1994], Pitacco [1999] References on actuarial models and statistical aspects of CCRC: Jones [1995], Jones [1996], Jones [1997a], Jones [1997b] 30/54 p. 30/54

31 7 LTCI: SOME NUMERICAL RESULTS Consider two LTC disability states i, i Probabilities of entering (from the healthy state) state i and i have been derived from OPCS prevalence data according to Gatenby s procedure See following Figure: solid line: healthy i dotted line: healthy i Mortality of disabled people have been obtained by increasing the mortality observed in the population according to the multiplicative model, with parameters η 1, η 2 31/54 p. 31/54

32 LTCI: some numerical results (cont d) Probabilities of becoming disabled from OPCS data 32/54 p. 32/54

33 LTCI: some numerical results (cont d) Refer to a LTC stand-alone cover, allowing for two disability states i, i Benefits: b if disability state = i b if disability state = i Following Figures: active reserve disabled reserves - LTC state i reserve - LTC state i reserve Note the different reserve amounts for any given age jump in the reserve profile when shifting from healthy state to state i or to state i (jump = sum at risk, in the life insurance language) 33/54 p. 33/54

34 LTCI: some numerical results (cont d) Reserve for the healthy state Age at entry x = 55; b = 600, b = 100; η 1 = 0.05, η 2 = /54 p. 34/54

35 LTCI: some numerical results (cont d) Reserve for the LTC state i Age at entry x = 55; b = 600, b = 100; η 1 = 0.05, η 2 = /54 p. 35/54

36 LTCI: some numerical results (cont d) Reserve for the LTC state i Age at entry x = 55; b = 100; η 2 = /54 p. 36/54

37 LTCI: some numerical results (cont d) Premiums and reserves obviously depend on all the assumptions, in particular on mortality assumptions for: healthy people disabled people in state i disabled people in state i See following Figure Higher mortality assumptions lower premiums To be on the safe-side mortality should not be overestimated 37/54 p. 37/54

38 LTCI: some numerical results (cont d) Single premium as a function of η 1, η 2, with 1 + η 2 = 1.05 (1 + η 1 ); various ages at entry; b = 600, b = /54 p. 38/54

39 LTCI: some numerical results (cont d) Refer to a whole-life assurance with acceleration benefit in the case of LTC claim Assume: paid for r years at most annual LTC benefit = sum assured r For example, r = 5 (i.e. 20% of the sum assured) 5 years covered A small premium increment, since the benefit is certain (in terms of total amount) 39/54 p. 39/54

40 LTCI: some numerical results (cont d) Single premium of a whole-life assurance with LTC acceleration benefit as a function of r compared to the single premium of a conventional whole-life insurance; c = ; x = 65; η = /54 p. 40/54

41 LTCI: some numerical results (cont d) Refer to an enhanced pension, allowing for one disability state annuity benefit b (a) while the annuitant is healthy annuity benefit b (i) while the annuitant is disabled With b = 1 000, we find: b (a) = 700 b (i) = Following Figures: reserves for the healthy state and the LTC state 41/54 p. 41/54

42 LTCI: some numerical results (cont d) Reserve for the healthy state Age at entry x = 65; b = 1000, b (a) = 700, b (i) = 3 438; η = /54 p. 42/54

43 LTCI: some numerical results (cont d) Reserve for the LTC state Age at entry x = 65; b = 1000, b (a) = 700, b (i) = 3 438; η = /54 p. 43/54

44 8 LONGEVITY RISK ISSUES In all lifelong living benefits (i.e. life annuities, lifelong sickness insurance covers, etc.) the insurer bears the longevity risk, in particular its systematic component (the aggregate longevity risk) caused by the possibility that all the insureds live, on average, longer than expected undiversifiable via pooling (i.e. inside the traditional insurance-reinsurance process) In health insurance products (e.g. LTCI), risk emerges further from uncertainty concerning time spent in disability states when living benefits are paid in case of disability it is not only important how long one lives, but also how long he/she lives in a condition of disability Reasonable to assume relationship between mortality and morbidity or disability Three main theories proposed about the evolution of senescent disability Most important features expressed in terms of trends in total life expectancy (TLE) and disability-free life expectancy (DFLE) length of the (senescent) disability period given by TLE-DFLE 44/54 p. 44/54

45 Longevity risk issues (cont d) Compression theory: chronic degenerative diseases will be postponed until the latest years of life thanks to medical advances. Assuming a maximum limit for total life expectancy improvements will result in a compression of the period of disability (see Figure (a)) Equilibrium theory: most of the changes in mortality are related to specific pathologies. The onset of chronic degenerative diseases and disability will be postponed and the time of death as well more or less constant spread between TLE and DFLE (see Figure (b)) Pandemic theory: improvements in mortality not accompanied by a decrease in disability rates an increasing spread between TLE and DFLE (see Figure (c)) number of disabled people will increase steadily 45/54 p. 45/54

46 Longevity risk issues (cont d) TLE TLE TLE life expectancy DFLE life expectancy DFLE life expectancy DFLE time time time (a) Compression theory (b) Equilibrium theory (c) Pandemic theory Trends in total life expectancy (TLE) and disability-free life expectancy (DFLE), according to different theories As regards the three theories, see: Browne [2011], Fries [1980], Gruenberg [1977], Kramer [1980], Manton [1982] For stochastic models of longevity risk in LTCI, see: Olivieri and Ferri [2003], Olivieri and Pitacco [2002] 46/54 p. 46/54

47 References American Academy of Actuaries. Long-term care. Actuarial issues in designing voluntary federal-private LTC insurance programs. Public Policy Monograph, Washington, Available at: R. Ainslie. Annuity and insurance products for impaired lives. The Staple Inn Actuarial Society, London, Available at: K. Black and H. D. Skipper. Life & Health Insurance. Prentice Hall, New Jersey, 2000 S. B. Brecht, S. Fein, and L. Hollinger-Smith. Preparing for the future: trends in Continuing Care Retirement Communities. Seniors Housing & Care Journal, 16(1): 47 62, 2009 B. Browne. Healthy longevity. Working Paper, Mortality Working Group of the IAA, Available at: D. Dullaway and S. Elliott. Long-term care insurance: a guide to product design and pricing. The Staple Inn Actuarial Society, London, Available at: long-term-care-insurance-guide-product-design-and-pricing 47/54 p. 47/54

48 References (cont d) J. F. Fries. Aging, natural death, and the compression of morbidity. The New England Journal of Medicine, 303(3): , 1980 P. Gatenby. Long Term Care. The Staple Inn Actuarial Society, London, Available at: E. M. Gruenberg. The failure of success. The Milbank Memorial Fund Quarterly. Health Society, 55(1):3 24, 1977 S. Haberman and E. Pitacco. Actuarial Models for Disability Insurance. Chapman & Hall/CRC, Boca Raton, USA, 1999 B. L. Jones. A stochastic population model for high demand CCRCs. Insurance: Mathematics & Economics, 16:69 77, 1995 B. L. Jones. Transient results for a high demand CCRC model. Scandinavian Actuarial Journal, pages , 1996 B. L. Jones. Stochastic models for continuing care retirement communities. North American Actuarial Journal, 1(1):50 73, 1997a B. L. Jones. Methods for the analysis of CCRC data. North American Actuarial Journal, 1(2):40 54, 1997b 48/54 p. 48/54

49 References (cont d) B. L. Jones. Long-term care insurance. In J. L. Teugels and B. Sundt, editors, Encyclopedia of Actuarial Science, volume 2, pages John Wiley & Sons, 2004 M. Kramer. The rising pandemic of mental disorders and associated chronic diseases and disabilities. Acta Psychiatrica Scandinavica, 62(S285): , 1980 M. P. Lawton and E. M. Brody. Assessment of older people: self-maintaining and instrumental activities of daily living. Gerontologist, 9: , 1969 K. G. Manton. Changing concepts of morbidity and mortality in the elderly population. The Milbank Memorial Fund Quarterly. Health Society, 60(2): , 1982 J. Martin and D. Elliot. Creating an overall measure of severity of disability for the Office of Population Censuses and Surveys disability survey. Journal of the Royal Statistical Society. Series A (Statistics in Society), 155(1): , 1992 I. McDowell. Measuring Health. A Guide to Rating Scales and Questionnaires. Oxford University Press, 2006 C. M. Murtaugh, B. C. Spillman, and M. J. Warshawsky. In sickness and in health: An annuity approach to financing Long-Term Care and retirement income. The Journal of Risk and Insurance, 68(2): , /54 p. 49/54

50 References (cont d) A. Olivieri and S. Ferri. Mortality and disability risks in Long Term Care insurance. IAAHS Online Journal, (1), Available at: Mortality_and_Disability_Risks_in_Long_Term_Care_Insurance.pdf A. Olivieri and E. Pitacco. Managing demographic risks in Long Term Care insurance. Rendiconti per gli Studi Economici Quantitativi, 2(2):15 37, 2002 E. Pitacco. LTC insurance. From the multistate model to practical implementations. In Proceedings of the 25th International ASTIN Colloquium, pages , Cannes, France, 1994 E. Pitacco. Multistate models for long-term care insurance and related indexing problems. Applied Stochastic Models in Business and Industry, 15: , 1999 E. Pitacco. Biometric risk transfers in life annuities and pension products: a survey. CEPAR Working Paper 2013/25, Available at: in_life_annuities_and_pension_products.pdf 50/54 p. 50/54

51 References (cont d) M. J. Warshawsky. The life care annuity - A proposal for an insurance product innovation to simultaneously improve financing and benefit provision for long-term care and to insure the risk of outliving assets in retirement. Georgetown University - Long-Term Care Financing Project. Working Paper No. 2, Available at: H. E. Winklevoss and A. V. Powell. Continuing Care Retirement Communities. An empirical, financial, and legal analysis. R. D. Irwin, Homewood, Illinois, 1984 D. K. Whynes. The provision and finance of long-term care in the United Kingdom. The Geneva Papers on Risk and Insurance, 21(79): , 1996 T. Zhou-Richter and H. Gründl. Life Care annuities - Trick or treat for insurance companies? Technical Report, Available at SSRN: P. Zweifel. Providing for long-term care: Insurance vs. trust saving. The Geneva Papers on Risk and Insurance, 21(79): , /54 p. 51/54

52 References (cont d) Something old... 52/54 p. 52/54

53 References (cont d) Ermanno Pitacco... and something new: (forthcoming) Health Insurance Basic actuarial models with the financial support by 53/54 p. 53/54

54 Many thanks for your kind attention 54/54 p. 54/54