Long-Term Care: risk description, lapse behavior of LTC - - PowerPoint PPT Presentation

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France

Long-Term Care: risk description, lapse behavior of LTC policyholders and issues in LTC financing

Jean Pinquet1

1Paris 10 & Ecole Polytechnique

AXA, avenue Matignon

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France

Outline of the presentation

Analysis of the demand side of Long-Term Care (LTC) insurance, from a case study on a portfolio of Spanish insurance contracts. Description of LTC risk. Analysis of lapse behavior for LTC policyholders. Issues in LTC financing.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France

Outline of the presentation

Analysis of the demand side of Long-Term Care (LTC) insurance, from a case study on a portfolio of Spanish insurance contracts. Description of LTC risk. Analysis of lapse behavior for LTC policyholders. Issues in LTC financing.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France

Outline of the presentation

Analysis of the demand side of Long-Term Care (LTC) insurance, from a case study on a portfolio of Spanish insurance contracts. Description of LTC risk. Analysis of lapse behavior for LTC policyholders. Issues in LTC financing.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France

Outline of the presentation

Analysis of the demand side of Long-Term Care (LTC) insurance, from a case study on a portfolio of Spanish insurance contracts. Description of LTC risk. Analysis of lapse behavior for LTC policyholders. Issues in LTC financing.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France LTC risk on a Spanish portfolio

Main results on LTC risk, either global or derived from a Spanish database

The probability to face an irreversible disability spell at the end of the life cycle is roughly equal to 0.2 (average on gender, derived for potential purchasers of LTC insurance). The average duration of a spell is about five years. Hence the expected duration in an LTC state is about one year when you are a young senior in good health. In France: 1M individuals in an LTC state, related public spending: >1% of GDP, (compared with 16M retirees and pensions=14.4%

• f GDP).

Results given later on LTC risks are drawn from the analysis of a Spanish portfolio (150000 policies; The contract is a bundle which comprises an LTC component together with health and life cover- ages; About 3000 LTC spells).

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France LTC risk on a Spanish portfolio

Main results on LTC risk, either global or derived from a Spanish database

The probability to face an irreversible disability spell at the end of the life cycle is roughly equal to 0.2 (average on gender, derived for potential purchasers of LTC insurance). The average duration of a spell is about five years. Hence the expected duration in an LTC state is about one year when you are a young senior in good health. In France: 1M individuals in an LTC state, related public spending: >1% of GDP, (compared with 16M retirees and pensions=14.4%

• f GDP).

Results given later on LTC risks are drawn from the analysis of a Spanish portfolio (150000 policies; The contract is a bundle which comprises an LTC component together with health and life cover- ages; About 3000 LTC spells).

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France LTC risk on a Spanish portfolio

Main results on LTC risk, either global or derived from a Spanish database

The probability to face an irreversible disability spell at the end of the life cycle is roughly equal to 0.2 (average on gender, derived for potential purchasers of LTC insurance). The average duration of a spell is about five years. Hence the expected duration in an LTC state is about one year when you are a young senior in good health. In France: 1M individuals in an LTC state, related public spending: >1% of GDP, (compared with 16M retirees and pensions=14.4%

• f GDP).

Results given later on LTC risks are drawn from the analysis of a Spanish portfolio (150000 policies; The contract is a bundle which comprises an LTC component together with health and life cover- ages; About 3000 LTC spells).

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France LTC risk on a Spanish portfolio

Main results on LTC risk, either global or derived from a Spanish database

The probability to face an irreversible disability spell at the end of the life cycle is roughly equal to 0.2 (average on gender, derived for potential purchasers of LTC insurance). The average duration of a spell is about five years. Hence the expected duration in an LTC state is about one year when you are a young senior in good health. In France: 1M individuals in an LTC state, related public spending: >1% of GDP, (compared with 16M retirees and pensions=14.4%

• f GDP).

Results given later on LTC risks are drawn from the analysis of a Spanish portfolio (150000 policies; The contract is a bundle which comprises an LTC component together with health and life cover- ages; About 3000 LTC spells).

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France LTC risk on a Spanish portfolio

Entry rate in LTC and duration of LTC spells

The entry rate was derived from a Lee-Carter specification of the transition intensity from good health to LTC (related to a proba- bility in a binomial distribution). The entry rate into LTC increases by 11% by suplementary year of

• age. No clear cohort effects.

Duration of LTC spells: the mortality rate in the LTC state is equal to 20% on average, increases by 5% and by 2% every year with age and calendar time, decreases by 15% for women w.r.t. men, and is almost unrelated to seniority in the LTC spell (results given ceteris paribus). These results confirm common knowledge on LTC risks (increase in frequency with calendar time due to the aging of the population, partly compensated by a decrease in duration (the ”compression

• f morbidity”).

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France LTC risk on a Spanish portfolio

Entry rate in LTC and duration of LTC spells

The entry rate was derived from a Lee-Carter specification of the transition intensity from good health to LTC (related to a proba- bility in a binomial distribution). The entry rate into LTC increases by 11% by suplementary year of

• age. No clear cohort effects.

Duration of LTC spells: the mortality rate in the LTC state is equal to 20% on average, increases by 5% and by 2% every year with age and calendar time, decreases by 15% for women w.r.t. men, and is almost unrelated to seniority in the LTC spell (results given ceteris paribus). These results confirm common knowledge on LTC risks (increase in frequency with calendar time due to the aging of the population, partly compensated by a decrease in duration (the ”compression

• f morbidity”).

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France LTC risk on a Spanish portfolio

Entry rate in LTC and duration of LTC spells

The entry rate was derived from a Lee-Carter specification of the transition intensity from good health to LTC (related to a proba- bility in a binomial distribution). The entry rate into LTC increases by 11% by suplementary year of

• age. No clear cohort effects.

Duration of LTC spells: the mortality rate in the LTC state is equal to 20% on average, increases by 5% and by 2% every year with age and calendar time, decreases by 15% for women w.r.t. men, and is almost unrelated to seniority in the LTC spell (results given ceteris paribus). These results confirm common knowledge on LTC risks (increase in frequency with calendar time due to the aging of the population, partly compensated by a decrease in duration (the ”compression

• f morbidity”).

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France LTC risk on a Spanish portfolio

Entry rate in LTC and duration of LTC spells

The entry rate was derived from a Lee-Carter specification of the transition intensity from good health to LTC (related to a proba- bility in a binomial distribution). The entry rate into LTC increases by 11% by suplementary year of

• age. No clear cohort effects.

Duration of LTC spells: the mortality rate in the LTC state is equal to 20% on average, increases by 5% and by 2% every year with age and calendar time, decreases by 15% for women w.r.t. men, and is almost unrelated to seniority in the LTC spell (results given ceteris paribus). These results confirm common knowledge on LTC risks (increase in frequency with calendar time due to the aging of the population, partly compensated by a decrease in duration (the ”compression

• f morbidity”).

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Lapse behavior in long-term insurance contracts

Heavy front-loading in long-term insurance and low surrender values in LTC insurance induce strong redistribution effects of contract lapses. Three basic lapse reasons: risk reasons, liquidity constraints, and misunderstanding of the contract. Losses incurred by lapses for risk reasons may be seen as a price to pay for hedging reclassification risk. Our data allow an appraisal of health state from the history of temporary disability spells.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Lapse behavior in long-term insurance contracts

Heavy front-loading in long-term insurance and low surrender values in LTC insurance induce strong redistribution effects of contract lapses. Three basic lapse reasons: risk reasons, liquidity constraints, and misunderstanding of the contract. Losses incurred by lapses for risk reasons may be seen as a price to pay for hedging reclassification risk. Our data allow an appraisal of health state from the history of temporary disability spells.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Lapse behavior in long-term insurance contracts

Heavy front-loading in long-term insurance and low surrender values in LTC insurance induce strong redistribution effects of contract lapses. Three basic lapse reasons: risk reasons, liquidity constraints, and misunderstanding of the contract. Losses incurred by lapses for risk reasons may be seen as a price to pay for hedging reclassification risk. Our data allow an appraisal of health state from the history of temporary disability spells.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Lapse behavior in long-term insurance contracts

Heavy front-loading in long-term insurance and low surrender values in LTC insurance induce strong redistribution effects of contract lapses. Three basic lapse reasons: risk reasons, liquidity constraints, and misunderstanding of the contract. Losses incurred by lapses for risk reasons may be seen as a price to pay for hedging reclassification risk. Our data allow an appraisal of health state from the history of temporary disability spells.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Lapse behavior in long-term insurance contracts

Policyholders who lapse have a better health history than their peers in terms of age and gender, and this difference increases with age. This is documented in the paper with a health ”bonus-malus” coefficient, which relates the actual disability duration to the ex- pected one. Other lapse reasons induce redistribution effects which can be seen as unpleasant. The poor policyholders subsidize richer ones if liquidity constraints are accounted for, and uninformed policy- holders subsidize more thoughtful ones is lapses are induced by a misunderstanding of the contract. Liquidity constraints are not very plausible on our data because premiums and benefits are very low. The next slide presents the lapse rate w.r.t. age for a policyholder with average covariates.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Lapse behavior in long-term insurance contracts

Policyholders who lapse have a better health history than their peers in terms of age and gender, and this difference increases with age. This is documented in the paper with a health ”bonus-malus” coefficient, which relates the actual disability duration to the ex- pected one. Other lapse reasons induce redistribution effects which can be seen as unpleasant. The poor policyholders subsidize richer ones if liquidity constraints are accounted for, and uninformed policy- holders subsidize more thoughtful ones is lapses are induced by a misunderstanding of the contract. Liquidity constraints are not very plausible on our data because premiums and benefits are very low. The next slide presents the lapse rate w.r.t. age for a policyholder with average covariates.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Lapse behavior in long-term insurance contracts

Policyholders who lapse have a better health history than their peers in terms of age and gender, and this difference increases with age. This is documented in the paper with a health ”bonus-malus” coefficient, which relates the actual disability duration to the ex- pected one. Other lapse reasons induce redistribution effects which can be seen as unpleasant. The poor policyholders subsidize richer ones if liquidity constraints are accounted for, and uninformed policy- holders subsidize more thoughtful ones is lapses are induced by a misunderstanding of the contract. Liquidity constraints are not very plausible on our data because premiums and benefits are very low. The next slide presents the lapse rate w.r.t. age for a policyholder with average covariates.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Lapse behavior in long-term insurance contracts

Policyholders who lapse have a better health history than their peers in terms of age and gender, and this difference increases with age. This is documented in the paper with a health ”bonus-malus” coefficient, which relates the actual disability duration to the ex- pected one. Other lapse reasons induce redistribution effects which can be seen as unpleasant. The poor policyholders subsidize richer ones if liquidity constraints are accounted for, and uninformed policy- holders subsidize more thoughtful ones is lapses are induced by a misunderstanding of the contract. Liquidity constraints are not very plausible on our data because premiums and benefits are very low. The next slide presents the lapse rate w.r.t. age for a policyholder with average covariates.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Lapse behavior in long-term insurance contracts

Policyholders who lapse have a better health history than their peers in terms of age and gender, and this difference increases with age. This is documented in the paper with a health ”bonus-malus” coefficient, which relates the actual disability duration to the ex- pected one. Other lapse reasons induce redistribution effects which can be seen as unpleasant. The poor policyholders subsidize richer ones if liquidity constraints are accounted for, and uninformed policy- holders subsidize more thoughtful ones is lapses are induced by a misunderstanding of the contract. Liquidity constraints are not very plausible on our data because premiums and benefits are very low. The next slide presents the lapse rate w.r.t. age for a policyholder with average covariates.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

0,02 0,04 0,06 0,08 0,1 0,12 0,14 10 20 30 40 50 60 70 80 Age (years)

Continuous lapse rate (six month centered moving average) as a function of age for a policyholder with average covariates

lapse rate

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Lapses and misunderstanding of the contract

Lapse rates are highest for young policyholders. They bought a bundle comprising an LTC coverage, which is usually bought at age 60. The mutual company which sold this bundle wanted to mimic a social security system, but differs deeply from a public scheme in terms of commitment. Many young policyholders lapsed probably because they clarified their insurance needs. There is a local peak at 65 years. Benefits are not modified in any way at the date of retirement, but the policyholders may have perceived this wrongly (thinking that health coverage is of the workers’ compensation type), which might account for this peak.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Lapses and misunderstanding of the contract

Lapse rates are highest for young policyholders. They bought a bundle comprising an LTC coverage, which is usually bought at age 60. The mutual company which sold this bundle wanted to mimic a social security system, but differs deeply from a public scheme in terms of commitment. Many young policyholders lapsed probably because they clarified their insurance needs. There is a local peak at 65 years. Benefits are not modified in any way at the date of retirement, but the policyholders may have perceived this wrongly (thinking that health coverage is of the workers’ compensation type), which might account for this peak.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Lapses and misunderstanding of the contract

Lapse rates are highest for young policyholders. They bought a bundle comprising an LTC coverage, which is usually bought at age 60. The mutual company which sold this bundle wanted to mimic a social security system, but differs deeply from a public scheme in terms of commitment. Many young policyholders lapsed probably because they clarified their insurance needs. There is a local peak at 65 years. Benefits are not modified in any way at the date of retirement, but the policyholders may have perceived this wrongly (thinking that health coverage is of the workers’ compensation type), which might account for this peak.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Lapses and misunderstanding of the contract

Lapse rates are highest for young policyholders. They bought a bundle comprising an LTC coverage, which is usually bought at age 60. The mutual company which sold this bundle wanted to mimic a social security system, but differs deeply from a public scheme in terms of commitment. Many young policyholders lapsed probably because they clarified their insurance needs. There is a local peak at 65 years. Benefits are not modified in any way at the date of retirement, but the policyholders may have perceived this wrongly (thinking that health coverage is of the workers’ compensation type), which might account for this peak.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Information issues are paramount

Better information on the contracts would reduce lapse rates due to misunderstanding. Better information on risks and costs could increase demand, especially for LTC (Browne, Gr¨ undl & Zhou- Richter). The portfolio was set in a run-off position in 1997. As the cover- ages are not fully funded (including LTC), a ”death spiral” should have been expected from a continuous departure of young poli- cyholders. This did not occur, and the portfolio reaches an equilibrium thanks to a mistaken perception of the situation by the youngest policy-

• holders. They are probably unaware of the run-off decision, nor
• f their position in the age distribution of the portfolio.

Hence a lack of information may also prevent sound lapsing de- cisions.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Information issues are paramount

Better information on the contracts would reduce lapse rates due to misunderstanding. Better information on risks and costs could increase demand, especially for LTC (Browne, Gr¨ undl & Zhou- Richter). The portfolio was set in a run-off position in 1997. As the cover- ages are not fully funded (including LTC), a ”death spiral” should have been expected from a continuous departure of young poli- cyholders. This did not occur, and the portfolio reaches an equilibrium thanks to a mistaken perception of the situation by the youngest policy-

• holders. They are probably unaware of the run-off decision, nor
• f their position in the age distribution of the portfolio.

Hence a lack of information may also prevent sound lapsing de- cisions.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Information issues are paramount

Better information on the contracts would reduce lapse rates due to misunderstanding. Better information on risks and costs could increase demand, especially for LTC (Browne, Gr¨ undl & Zhou- Richter). The portfolio was set in a run-off position in 1997. As the cover- ages are not fully funded (including LTC), a ”death spiral” should have been expected from a continuous departure of young poli- cyholders. This did not occur, and the portfolio reaches an equilibrium thanks to a mistaken perception of the situation by the youngest policy-

• holders. They are probably unaware of the run-off decision, nor
• f their position in the age distribution of the portfolio.

Hence a lack of information may also prevent sound lapsing de- cisions.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Information issues are paramount

Better information on the contracts would reduce lapse rates due to misunderstanding. Better information on risks and costs could increase demand, especially for LTC (Browne, Gr¨ undl & Zhou- Richter). The portfolio was set in a run-off position in 1997. As the cover- ages are not fully funded (including LTC), a ”death spiral” should have been expected from a continuous departure of young poli- cyholders. This did not occur, and the portfolio reaches an equilibrium thanks to a mistaken perception of the situation by the youngest policy-

• holders. They are probably unaware of the run-off decision, nor
• f their position in the age distribution of the portfolio.

Hence a lack of information may also prevent sound lapsing de- cisions.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Blackwell and Hirshleifer effects of information

The case study emphasized positive effects of information (im- proved decision making, the Blackwell effect). However LTC insurance is threatened by the negative effect of in- formation (less efficient ex ante risk sharing, the Hirshleifer effect). Medical tests are expected soon to be able to predict neurodegen- erative diseases far ahead. This would reduce the range of LTC insurance.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Blackwell and Hirshleifer effects of information

The case study emphasized positive effects of information (im- proved decision making, the Blackwell effect). However LTC insurance is threatened by the negative effect of in- formation (less efficient ex ante risk sharing, the Hirshleifer effect). Medical tests are expected soon to be able to predict neurodegen- erative diseases far ahead. This would reduce the range of LTC insurance.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France Lapses and misunderstanding of the contract Blackwell and Hirshleifer effects

Blackwell and Hirshleifer effects of information

The case study emphasized positive effects of information (im- proved decision making, the Blackwell effect). However LTC insurance is threatened by the negative effect of in- formation (less efficient ex ante risk sharing, the Hirshleifer effect). Medical tests are expected soon to be able to predict neurodegen- erative diseases far ahead. This would reduce the range of LTC insurance.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France

Issues in LTC financing

Everywhere, reforms of LTC financing try to lighten the burden

• f public coverage.

Self-financing channels of LTC costs are LTC insurance, asset and income depletion during the LTC spell, and recovery on bequests for underfinanced LTC spells (plus non monetary component: informal care provided by relatives). The French LTC insurance market is ranked second in the world. However it does not contribute much to LTC financing. (As of 2009: premiums=403M euros ; benefits=128M euros, reserves=2.6G euros, compared with public expenses equal to 21.5G euros). Increasing self-financing channels monitored by the public au- thorities (income depletion and especially recovery on bequests) would increase the incentives to buy LTC insurance.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France

Issues in LTC financing

Everywhere, reforms of LTC financing try to lighten the burden

• f public coverage.

Self-financing channels of LTC costs are LTC insurance, asset and income depletion during the LTC spell, and recovery on bequests for underfinanced LTC spells (plus non monetary component: informal care provided by relatives). The French LTC insurance market is ranked second in the world. However it does not contribute much to LTC financing. (As of 2009: premiums=403M euros ; benefits=128M euros, reserves=2.6G euros, compared with public expenses equal to 21.5G euros). Increasing self-financing channels monitored by the public au- thorities (income depletion and especially recovery on bequests) would increase the incentives to buy LTC insurance.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France

Issues in LTC financing

Everywhere, reforms of LTC financing try to lighten the burden

• f public coverage.

Self-financing channels of LTC costs are LTC insurance, asset and income depletion during the LTC spell, and recovery on bequests for underfinanced LTC spells (plus non monetary component: informal care provided by relatives). The French LTC insurance market is ranked second in the world. However it does not contribute much to LTC financing. (As of 2009: premiums=403M euros ; benefits=128M euros, reserves=2.6G euros, compared with public expenses equal to 21.5G euros). Increasing self-financing channels monitored by the public au- thorities (income depletion and especially recovery on bequests) would increase the incentives to buy LTC insurance.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France

Issues in LTC financing

Everywhere, reforms of LTC financing try to lighten the burden

• f public coverage.

Self-financing channels of LTC costs are LTC insurance, asset and income depletion during the LTC spell, and recovery on bequests for underfinanced LTC spells (plus non monetary component: informal care provided by relatives). The French LTC insurance market is ranked second in the world. However it does not contribute much to LTC financing. (As of 2009: premiums=403M euros ; benefits=128M euros, reserves=2.6G euros, compared with public expenses equal to 21.5G euros). Increasing self-financing channels monitored by the public au- thorities (income depletion and especially recovery on bequests) would increase the incentives to buy LTC insurance.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France

Issues in LTC financing

Incentives are only efficient for households with significant be- queathable assets. A radical alternative is mandatory LTC insurance. The pros: no adverse selection, affordable if enforced early in the life cycle. The cons: only provides financing at a remote horizon, rejected by poor households, high intermediation costs if bought as an individual coverage.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France

Issues in LTC financing

Incentives are only efficient for households with significant be- queathable assets. A radical alternative is mandatory LTC insurance. The pros: no adverse selection, affordable if enforced early in the life cycle. The cons: only provides financing at a remote horizon, rejected by poor households, high intermediation costs if bought as an individual coverage.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France

Issues in LTC financing

Incentives are only efficient for households with significant be- queathable assets. A radical alternative is mandatory LTC insurance. The pros: no adverse selection, affordable if enforced early in the life cycle. The cons: only provides financing at a remote horizon, rejected by poor households, high intermediation costs if bought as an individual coverage.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues

Outline of the presentation Long-term care risk as a part of global longevity risk An analysis of lapse behavior The reform of LTC financing in France

Issues in LTC financing

Incentives are only efficient for households with significant be- queathable assets. A radical alternative is mandatory LTC insurance. The pros: no adverse selection, affordable if enforced early in the life cycle. The cons: only provides financing at a remote horizon, rejected by poor households, high intermediation costs if bought as an individual coverage.

Jean Pinquet Conference on longevity and pensions funds Long-Term Care: risk description, lapse behavior of LTC policyholders and issues