XXVII ICA - Cancun, 2002 Health Seminar Critical Issues in Managing Long Term Care Insurance LONG TERM CARE INSURANCE IN ITALY Ermanno Pitacco University of Trieste
Outline The scenario The need for LTC covers The LTC insurance market Public vs private: towards a LTC policy? The insurers role
The scenario Demographic scenario: ageing population Decreasing mortality and increasing life expectation Decreasing fertility Decreasing family size Disability scenario High prevalence rates at very old ages Increasing prevalence rates in the population Immigration Trends
AGEING POPULATION 1911 2000 Age Males Females Age Males Females 0-24 25.82 % 25.92 % 0-24 13.72 % 13.06 % 25-29 18.27 % 19.81 % 25-29 24.87 % 24.85 % 60-5.02 % 5.18 % 60-9.96 % 13.55 % Age and sex distribution - Source: ISTAT
DECREASING MORTALITY (1) 100000 80000 60000 40000 SIM 1881 SIM 1901 SIM 1931 SIM 1951 SIM 1961 SIM 1971 SIM 1981 SIM 1992 20000 0 0 10 20 30 40 50 60 70 80 90 100 Survival functions Source: ISTAT
DECREASING MORTALITY (2) 4000 3500 3000 2500 2000 SIM 1881 SIM 1951 SIM 1981 SIM 1992 1500 1000 500 0 0 10 20 30 40 50 60 70 80 90 100 Curves of deaths Source: ISTAT
INCREASING EXPECTATION OF LIFE (1) 90 80 70 F 60 M 50 1951 1961 1971 1981 1991 M = males, F = females Expectation of life at birth Source: ISTAT
INCREASING EXPECTATION OF LIFE (2) 90 80 70 V1 60 V2 V3 50 1951 1961 1971 1981 1991 V1 = expectation of life at 60 V2 = Lexis point (age of max prob of death) V3 = expectation of life at birth Source: ISTAT
DECREASING FERTILITY 3 2,5 2 1,5 1 0,5 0 1960 1965 1970 1975 1980 1985 1990 1995 Average number of children per woman Source: ISTAT
DECREASING FAMILY SIZE (1) 30 20 10 0 1991 1 2 3 4 5 6 1961 1971 1981 Distribution of the family size Source: ISTAT
DECREASING FAMILY SIZE (2) 4 3 2 1 1961 1971 1981 1991 Average family size Source: ISTAT
DISABILITY PREVALENCE (1) 16 14 Males - ADLs 2 12 10 8 Males - ADLs 3 Females - ADLs 2 Females - ADLs 3 6 4 2 0 15-24 25-44 45-54 55-59 60-64 65-69 70-74 75-79 80 Age group Disability prevalence rates among males and females (prevalence rates x 100) Sources: ISTAT (1990), ANIA
DISABILITY PREVALENCE (2) Age group 70-74 Age group 75-79 Age group 80 24 24 24 21 18 Males 21 18 Males 21 18 Males 15 Females 15 Females 15 Females 12 12 12 9 9 9 6 6 6 3 3 3 0 0 0 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 ADLs ADLs ADLs Disability prevalence rates among males and females (prevalence rates x 100) Sources: ISTAT (1990), ANIA
IMMIGRATION 2,5 2 1,5 1 0,5 0 1995 1996 1997 1998 1999 % foreign residents Source: ISTAT Effects on population dynamics?
MORTALITY TRENDS RECTANGULARIZATION EXPANSION 1 1 0 age ω 0 age ω ω' rectangularization a higher concentration of deaths around the Lexis point expansion moving Lexis point (LONGEVITY RISK)
JOINT MORTALITY AND DISABILITY TRENDS T = total expected life H = expected life in the healthy state COMPRESSION THEORY PANDEMIC THEORY EQUILIBRIUM THEORY expectations T H expectations T H expectations T H calendar year calendar year calendar year Three theories dramatic differences in LTC need
Trends in the demand for LTC at an individual level: compression theory decreasing equilibrium theory constant pandemic theory increasing at a collective level (with an increasing elderly population): compression theory stable equilibrium theory increasing pandemic theory dramatically increasing
UNCERTAINTY IN FUTURE TRENDS Trends lead to the use of projections Risks for the provider of LTC covers random deviations (process risk: a pooling risk) systematic deviations (parameter or model risk, implied by uncertainty of future trends: a nonpooling risk) a critical issue in managing LTC covers technical tools risk based capital safety loadings reinsurance
The need for LTC covers originates from demographic trends increasing expectation of life low birth rates expectation of life in the disability state (increasing?) social developments changes in the structure of the family changes in the welfare system
Barriers obstacling LTC insurance diffusion demand side difficulties in perceiving (at young ages) the value of LTC benefits high cost of LTC covers (at old ages) supply side lack of reliable experience data uncertainty about future trends in mortality and old-age disability adverse selection moral hazard claims control critical issues in LTC insurance construction
The LTC insurance market Market developments in Italy LTC covers became available in 1997 20 years later than in U.S. the first LTC product offered by SASA VITA (August 1997) 6 ADLs based; benefit trigger: 3 ADLs fixed amount annuity 12 insurers at present offer LTC products (some will offer LTC products in a very near future)
The products Types of benefits fixed amount annuities (usually with investment profit participation) amount dependent on the disability level (ADLs) amount independent of the disability level indemnity insurance, i.e. nursing and medical expense reimbursement (one insurer) Premiums single premium periodic premiums level premiums recurrent single premiums waived during disability
Structures of annuity products stand alone LTC annuity LTC cover as a rider benefit (e.g. whole life assurance + LTC annuity, possibly as accelerated benefit) enhanced pension b'' b b' time appealing product (not a pure risk product) easily embedded into pension schemes lower systematic risk for the insurer
Technical bases Lack of insurance experience Data available at population level (e.g. ISTAT) are prevalence data can be used to evalutate probabilities of being disabled sound actuarial structures are based on transition probabilities, or on probabilities of becoming disabled and remaining disabled (inception - annuity models) possibility (used in actuarial practice) PREVALENCE RATES + HYPOTHESES PROBABILITIES OF BECOMING AND REMAINING DISABLED
Technical basis suggested by ANIA (1997) Difficulties in using prevalence rates Data from other countries Proposal: use data from Germany (data from Germany already used in Italy in pricing disability benefits provided by IP policies) Data structure mortality of disabled people: obtained increasing population mortality (aggregate mortality) probability of becoming disabled: obtained from German data (adjusted, to allow for differential disability among males and females) allowing for different disability states (ADL based) via weighting annuity benefits with prevalence rates
Need for experience rating critical issue in managing LTC covers monitoring the insured population disability inception rates (possibly allowing for various ADL-based states) mortality of healthy people mortality of disabled people (possibly allowing for various ADL-based states) nursing and medical costs adjustment of premiums according to credibility principles reserving based on experience
Public vs private: towards a LTC policy Present situation 1st pillar daily allowance to person providing assistance (paid by the social security system) other allowances depending on local health care provisions (a poor presence) 2nd pillar some pension scheme provides LTC annuities in the form of enhanced pensions no sick fund operates (lack of legislation) (a rather poor presence)
3rd pillar individual LTC policies Tax concessions (since 2001): detraction of 19% of LTC premium from taxes; maximum amount of premiums (including premiums for death and disability covers) = 1300 Euro LTC benefits tax-free (a slowly increasing market)
Possible future settlements improving the diffusion of LTC insurance cover (see ISVAP, 2001) compulsory LTC insurance, through mutual sick funds (and possibly insurance companies) LTC provision organized by the National Health System public + private providers financing LTC insurance: funding vs pay-as-you-go LTC cover as a compulsory item in pension schemes enhanced pension benefits funded via periodic contributions
The insurers role Also depending on the national LTC policy, the insurer can: provide individual covers, e.g. stand-alone annuity covers enhanced pension products nursing and medical expense refunding provide groupe insurance products provide insurance cover for pension schemes including LTC benefits e.g. enhanced pensions
provide stop-loss covers for sick funds including LTC benefits nursing and medical expense refunding fixed amount annuities (possibly ADL based)
References ISVAP (1998), Long Term Care - Le prospettive per il mercato assicurativo italiano. Due modelli a confronto: Germania e Stati Uniti, Quaderno n. 3 ISVAP (2001), Il costo e il finanziamento dell assistenza agli anziani non autosufficienti in Italia, Quaderno n. 11 Proceedings of the 114th EU Insurance Supervisors, Helsinki, 2000 Proceedings of the 116th EU Insurance Supervisors, Oslo, 2001 G. Galatioto (1997), Long Term Care Insurance. Gli aspetti tecnicoattuariali ed i dati statistici. Ipotesi di base tecnica, ANIA S. Haberman, E. Pitacco (1999), Actuarial models for disability insurance, Chapman & Hall / CRC
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