Care-Dependent Tontines

44 Pages Posted: 14 Jul 2021 Last revised: 15 Dec 2021

See all articles by An Chen

An Chen

Ulm University - Institute of Insurance Science

Yusha Chen

Ulm University - Department of Mathematics and Economics

Xian Xu

Fudan University - School of Economics

Date Written: December 14, 2021

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

Suggested Citation

Chen, An and Chen, Yusha and Xu, Xian, Care-Dependent Tontines (December 14, 2021). Available at SSRN: https://ssrn.com/abstract=3880661 or http://dx.doi.org/10.2139/ssrn.3880661

An Chen

Ulm University - Institute of Insurance Science ( email )

Ulm, 89081
Germany

HOME PAGE: http://www.uni-ulm.de/mawi/ivw/team

Yusha Chen (Contact Author)

Ulm University - Department of Mathematics and Economics ( email )

Helmholzstrasse
Ulm, D-89081
Germany

HOME PAGE: http://https://www.uni-ulm.de/mawi/ivw/institut/team/yusha-chen/

Xian Xu

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

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