Product Pricing and Solvency Capital Requirements for Long-Term Care Insurance

49 Pages Posted: 6 Mar 2015

See all articles by Adam Wenqiang Shao

Adam Wenqiang Shao

University of New South Wales - ARC Centre of Excellence in Population Ageing Research (CEPAR); Milliman

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies; UNSW Australia Business School

Joelle H. Fong

National University of Singapore

Date Written: February 27, 2015

Abstract

This paper presents a comprehensive assessment of premiums, reserves and solvency capital requirements for long-term care (LTC) insurance policies using Activities of Daily Living (ADLs) and U.S. data. We compare stand-alone policies, rider benefit policies (LTC insurance combined with whole life insurance), life care annuities (LTC insurance combined with annuities), and shared LTC insurance in terms of premium cost and solvency capital requirements. Premiums and best-estimate reserves for generic 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. Solvency capital requirements for longevity risk and disability risk are based on the Solvency II standard formula. We quantify the extent to which rider benefit policies and life care annuities provide lower solvency capital requirements than stand-alone LTC insurance policies. We show how a maximum benefit period can reduce costs and risks for LTC insurance products.

Keywords: Long-term care insurance; Solvency II; solvency capital requirements

JEL Classification: G22, G32, G32, I11, I13

Suggested Citation

Shao, Adam Wenqiang and Sherris, Michael and Fong, Joelle H., Product Pricing and Solvency Capital Requirements for Long-Term Care Insurance (February 27, 2015). UNSW Business School Research Paper No. 2015ACTL03. Available at SSRN: https://ssrn.com/abstract=2574533 or http://dx.doi.org/10.2139/ssrn.2574533

Adam Wenqiang Shao (Contact Author)

University of New South Wales - ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

CEPAR, Level 3
East Wing, NICTA Building, UNSW
Sydney, New South Wales NSW 2052
Australia

Milliman ( email )

One Pennsylvania Plaza 38th Floor
New York, NY 10119
United States

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies ( email )

UNSW Business School
Risk and Actuarial Studies
Sydney, NSW 2052
Australia
+61 2 9385 2333 (Phone)
+61 2 9385 1883 (Fax)

HOME PAGE: http://www.asb.unsw.edu.au/schools/Pages/MichaelSherris.aspx

UNSW Australia Business School ( email )

Sydney, NSW 2052
Australia

Joelle H. Fong

National University of Singapore ( email )

469C BUKIT TIMAH ROAD, LKYSPP
SINGAPORE, Singapore 259771
Singapore

HOME PAGE: http://https://lkyspp.nus.edu.sg/our-people/faculty/fong-hung-yee-joelle

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