Long-Term Care Insurance: Knowledge Barriers, Risk Perception and Adverse Selection

59 Pages Posted: 24 Nov 2017

See all articles by M. Martin Boyer

M. Martin Boyer

HEC Montreal - Department of Finance

Philippe De Donder

CNRS, Toulouse School of Economics

Claude Fluet

Université Laval

M.‐L. Leroux

University of Quebec at Montreal (UQAM)

Pierre-Carl Michaud

University of Quebec at Montreal (UQAM) - Department of Economics; Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPÉE); RAND Corporation, Labor and Population; IZA Institute of Labor Economics; Netspar

Multiple version iconThere are 2 versions of this paper

Date Written: October 19, 2017

Abstract

We conduct a stated-choice experiment where respondents are asked to rate various insurance products aimed to protect against financial risks associated with long-term care needs. Using exogenous variation in prices from the survey design, and objective risks computed from a dynamic microsimulation model, these stated-choice probabilities are used to predict market equilibrium for long-term care insurance using the framework developed by Einav et al. (2010). We investigate in turn causes for the low observed take-up of long-term care insurance in Canada despite substantial residual out-of-pocket financial risk. We first find that awareness and knowledge of the product is low in the population: 44% of respondents who do not have long-term care insurance were never offered this type of insurance while overall 31% report no knowledge of the product. Although we find evidence of adverse selection, results suggest it plays a minimal role in limiting take-up. On the demand side, once respondents have been made aware of the risks, we find that demand remains low, in part because of misperceptions of risk, lack of bequest motive and home ownership which may act as a substitute.

Keywords: Long-Term Care Insurance, Adverse Selection, Stated-Preference, Health, Insurance

JEL Classification: I110

Suggested Citation

Boyer, M. Martin and De Donder, Philippe and Fluet, Claude-Denys and Leroux, Marie-Louise and Michaud, Pierre-Carl, Long-Term Care Insurance: Knowledge Barriers, Risk Perception and Adverse Selection (October 19, 2017). CESifo Working Paper Series No. 6698. Available at SSRN: https://ssrn.com/abstract=3075158

M. Martin Boyer

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Philippe De Donder (Contact Author)

CNRS, Toulouse School of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

HOME PAGE: http://https://www.tse-fr.eu/people/philippe-de-donder

Claude-Denys Fluet

Université Laval ( email )

2214 Pavillon J-A. DeSeve
Quebec, Quebec G1K 7P4
Canada
1-418-656-2131, ext 3290 (Phone)

Marie-Louise Leroux

University of Quebec at Montreal (UQAM) ( email )

PB 8888 Station DownTown
Succursale Centre Ville
Montreal, Quebec H3C3P8
Canada

Pierre-Carl Michaud

University of Quebec at Montreal (UQAM) - Department of Economics ( email )

P.O. Box 8888, Downtown Station
Montreal, Quebec H3C 3P8
Canada

Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPÉE) ( email )

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

RAND Corporation, Labor and Population ( email )

Santa Monica, CA 90407-2138
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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