Product Pricing and Solvency Capital Requirements for Long-Term Care Insurance
49 Pages Posted: 6 Mar 2015
Date Written: February 27, 2015
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
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