Care-Dependent Tontines

Abstract

With the gradual deepening of aging, the affordability of long-term care (LTC) services in aging societies will become increasingly questionable. Both private stand-alone LTC insurance and care-dependent annuity do not seem to provide efficient solutions, due to their high risk charges. In this article, we propose two ways of combining the long-term care business with retirement tontines, i.e. care-dependent tontines, which shift a part of longevity risk to policyholders and provide increased payments in care-dependent state. We determine the optimal payment structures of these products that maximize the individuals' expected lifetime utility. Using realistic risk loadings based on data from China Health and Retirement Longitudinal Study (CHARLS) and capital requirement of China Risk Oriented Solvency System (C-ROSS), it is shown that both care-dependent tontines present as better choices for individuals, comparing to care-dependent annuities. The results are robust in a different regulation scheme -- Solvency II. Our findings contribute to improving the penetration of elderly care insurance with appealing care-dependent insurance products.

Keywords: Tontine; Care-dependent; Lifetime utility

JEL Classification: G22, G13