Ch 7: Long-term care insurance

Question 1

Describe a long term care insurance contract

(def, 1)

(cust needs, 9)

(group, )

Answer 1

1. A long term care insurance conctract may provide a cash benefit or indemnify the insured for the cost of long term care
   – long term care - all forms of continuing personal or nursing care and associated domestic services, for people who are unable to look after themselves without some degree of support, whether provided in their own homes, at a day centre, or in a State-sponsored or care-home setting
2. Customer needs met
   
   1. Finance provision of care/assistance (in old age)
   2. Financial protection (when a person becomes unable to look after self)
   3. Protect from insufficient funds/inadequate state care
   4. Avoid dependence
   5. Provide comfort (for insured, for insured’s relatives/family)
   6. Generally doesn’t indemnify
   7. Uncertainty associated with state provided cover
   8. Inflation protection of care costs (if indemnity)
   9. Advice on care
3. Group versions don’t typically exist

Question 2

What is long term care?

Answer 2

1. All forms of continuing
   
   1. personal care or
   2. nursing care and associated domestic services…
2. …for people who are unable to look after themselves without some degree of support,
3. whether provided in
   
   1. their own homes,
   2. at a day centre,
   3. or in a state sponsored or care home setting.

Question 3

Describe

(i) the optimal outcomes of long term care, and (1, 2 ; 1)

Answer 3

1. Long term care aims to treat the result of the condition, not the condition itself. Ideally we want
   
   1. help individual regain independence
   2. slow down detorioration
   3. provide necessary care support and environment to maintain well-being
2. Medical care also important aspect of long term care, where physical/mental breakdown requires doctors/nursing staff. Usually expensive!

Question 4

Describe

the 3 types of costs associated with long term care (3, 5)

Answer 4

Costs can be related to

1. ​living:
   
   1. food, clothing, hearing, ammenities
   2. may require special arrangements, and increased cost impact
2. housing: rent, mortgage payments, council tax)
3. personal care:
   
   1. added costs of being looked after/having body touched (intimacy/personal dignity/confidentiality issues)
   2. nursing care: needs knowledge/skills of qualified nurse
   3. intermediate care: focuses on recuperative services after an acute event (e.g. heart-attack) to reduce avoidable hospital admission/minimise dependence on ongoing care

Question 5

Briefly describe the 2 main ways in which long term care may be provided, in terms of who the providers of care services are, and how qualified these providers are

(1, 3)

(1, 5)

Answer 5

1. Formal care
   
   1. Care which is provided via a professional services either in
      
      1. Own home
      2. Home of near relatives
      3. Managed residential homes
      4. Retirement community
2. Informal care
   
   1. Care typically provied by spouses/family/relatives, not provided via professional services, usually limited to not more than 4 hours per week.
   2. Often carries indirect cost (lost economic activity)
   3. Influenced by
      
      1. Cultural/religious practices
      2. Attituted towards caring for older generation
      3. Geographic family dispersion
      4. Family structure changes (divorces, re-marriage, lower birth rates)
      5. Proportion of working women –> informal care sector shrinks

Question 6

What are the 2 main types of long term care contracts? (2)

(in terms timing of funding compared to timing of when benefits are paid)

Answer 6

1. Pre funded long term care contracts
   
   • purchased by relatively healthy people to protect them against risk of future disability/morbidity
   • something else worth noting: because these contracts provide for future disability, a claims trigger will need to be met to pay benefit. This is not the case for immediate needs long term care contracts
2. Immediate needs long term care contracts
   
   1. Purchased by people already in a state of needing long term care, needing to protect against uncertain survival duration

Question 7

Pre funded long term care contracts: discuss the following:

• structure, in terms of the ‘policy being sold by itself’ vs ‘the policy in addition to other policies’ (5)
• funding/financing for the care required by the policyholder…ie premiums payable (4)

Answer 7

Structure may either be:

1. Standalone: this is the case most of the time
2. Rider: added to
   
   1. CI: TPD definition changes at age 60 to ‘loss of independent existence’
   2. Whole of life: fixed % of benefit accelerated when LTC claim definition satisfied
   3. IP: cover annuities beyond NRA, definitions change from occupation based to activity based
      * not popular because (a) there is no overlap of benefits and (b) no link between the level of IP and LTCI benefits (IP benefits depend on earnings and LTC benefits depend on the difference between the cost of care and the amount the insured can afford)

Funding:

1. Single premium
2. Regular premiums: usually increase with chosen benefit increase rate
3. Restricted regular premiums:
   
   1. up to certain age (NRA?)
   2. non during specified level of disability e.g. waiver of premium
4. Retrospective payment: equity release after sale of home

Question 8

Pre funded long term care contracts:

Discuss Claims trigger and claims definition

Answer 8

Claims trigger: a single event or multiple events
- uses ADL and cognitive impairment as the trigger to measure dependency
1. usually: failure of insured to undertake certain # of ADLs unaided
2. Mental impairment trigger

1. Examples of ADLs (activities of daily living)
   
   1. Physical incapacity
      
      1. feeding, washing, dressing, toileting
      2. mobility: able to move indoors, room to room, level surface at normal residence
      3. transfer: able to move from lying position to sitting position in upright chair/wheel chair
   2. Mental incapacity:
      
      1. deterioration/loss of mental capacity from organic cause=> need for care/supervision
         
         • organic cause (alzheimer’s, irrversible dementia,
         • NOT depression/side effects from other medication
      2. Covers
         
         • memory
         • knowing who/where they are
         • awareness of time
         • ability to solve simple problems
         • make rational decisions

Question 9

Pre funded long term care contracts:

Discuss the benefits provided in terms of

2 key factors for claim definitions (3)

Answer 9

1. Two key factors
   
   1. payment depends on claim definition
      
      • single event (depend on level of disability, continuation for a specified period), or multiple set of events
      • complex triggers also possible (e.g. need to be disabled and require care during night)
   2. more stringent definition = cheaper premiums

Question 10

Pre funded long term care contracts:

Discuss the benefits provided in terms of

What benefit depends on (2), and the advantages (4) and disadvantages (3) of this

Answer 10

• Benefit depends on
  
  1. Level of disability e.g. 50% fail on 2 ADLs and 100% fail on 3+ ADLs
  2. May depend on residence: own vs nursing; not important if indemnify (Benefits are usually not dependent on the place of residence for cash benefits not indemnity)
• Advantages
  
  1. Care provided at early age if there’s modest impairment
  2. Better match customer needs
  3. Perceived better value
  4. Novel feature may attract intermediaries
• Disadvantages
  
  1. Increased admin costs
  2. Pricing more difficult
  3. Design more complex=> detailed literature, more effort to sell

Question 11

Pre-funded long term care contracts:

Discuss the benefits provided and

Other benefit (2)

What happens on early death (1)

Surrender value and paid up value (2)

Answer 11

1. Benefit forms
   
   1. Lump sum
   2. Annuity certain
   3. Lifetime benefit (subject to ongoing disability)
   4. Restricted benefit (maximum period, or maximum total)
2. Benefit escalation rates
   
   1. level
   2. fixed rate
   3. linked to inflation index
3. Length of payment: lifetime or fixed period
4. Other benefits
   
   1. Assistive devices: norm limited to 3 or 6x main monthly benefit
   2. Independent care advice: at claim, help insured understand choices available and right to state suppose
5. Return premiums on early death (single premium unlikely for reg premium)
6. No surrender benefit
7. Paid up benefit

Question 12

Immediate needs long term care contracts: discuss the following

Form (2)

Premium and how it’s determined (2)

Benefit level (2)

Death benefit payable (4)

Structure (6)

Answer 12

1. Usually some form of impaired life annuity
   
   1. Secured by single premium at start of contract…
   2. …when insured needs care as result of failing ill health
   • 2. Premium
        1. Calculated individually, based on health status at purchase
        2. Premium guarantees not relevant (for single premium policies)
   • 3. Benefit level
        1. May increase with pre-agreed benefit increase rates, with specified nursing home list
        2. May increase with worsening incapacity
   • 4. Death benefit may be payable
        1. gives capital protection of part of single premium
        –> the higher the death benefit => less impact of health status on premium
        3. may be subject to minimum payment period
        4. usually just amortise single premium
   • 5. Structure:
        1. could be: pure endowment, purchased life annuities, disability covers
        2. structure should consider
     6. tax position ( of policyholder and life office)
     7. regulatory capital required
     8. benefit flexibility

Question 13

Variations for long term care insurance contracts:

What kind of variations may be found in terms of the level of benefits paid (4)

What are the advantages of having these variations (1)

What are the disadvantages of having these variations(2)

Answer 13

Types of variations

1. Guaranteed terms
2. Indemnity benefits
3. Cash benefits
4. Unit-linked

Advantages

1. increase level of customer demand (extended range of benefits/enhanced quality)

Disadvantages

1. May lead to confusion about product suitability
2. May be costly for insurers/reinsurers

Question 14

Variations for long term care insurance contracts: guaranteed terms

What important need does the provision of guaranteed terms meet/recognise? (2)

What impact does provision of guarantees have on pricing of LTC contracts? (2)

What issues arise through the provision of guaranteed terms: for insurer (1) and for policyholder (1)

What ‘tweaks’ may the insurer make to the guaranteed terms offered to help manage the risk? (2)

Answer 14

1. Recognises:
   
   • policyholders’ intended need for indemnity against all future costs
   • can’t take additional risks associated with additional premium/reduced benefit
2. May include substantial contingency loadings
   
   • leading to far lower reviewed premiums than guaranteed premiums..
   • …may be attractive to policyholders
3. Issues of offering guaranteed terms
   
   1. True costs could be extensive
      
      • Uncertainty in pricing basis + additional regulatory capital needed due to guarantee
   2. Favourable experience may not be passed to customer
4. To help manage the risks introduced, guaranteed terms may be
   
   1. age dependent: insurer not seeking further premiums/benefit reductions past given age
   2. limited: protection for 5 or 10 years

Question 15

Variations for long term care insurance contracts:

Indemnity benefits (1)

What are the characteristics of the benefit paid when indemnity cover is given(4)

What important implication does provision of indemnity benefits have on cost? (1)

What is the common industry practice in terms of provision of indemnity benefits? (1)

Answer 15

1. Indemnify insured=> pay for full cost of treatment/care received by policyholder
2. Benefit
   
   • may be unknown
   • may be paid directly to provider=> extract better provider terms with bargaining power
   • subject to policy conditions e..g deferred period, restriction on provider
   • may be subject to overriding maximums, so not full indemnity
3. Uncertainty of future costs=> high margins => prohibitively expensive
4. Few insurers give true indemnity; simply too much uncertainty

Question 16

Variations for long term care insurance contracts:

Define what we mean by cash benefits, and how they’re determined (4)

What is the key policyholder advantage of giving cash benefits? (1)

What main issue arises for insurer if cash benefits are provided, and how might this be mitigated? (1)

What policyholder issues may arise with the provision of cash benefits? (3 main points, 3 subpoints)

Answer 16

Cash benefits

1. Cash benefits given either in form of lump sum, or, more usually, an income the level of which is specified in contract
2. Benefit level chosen
   
   1. to meet expected cost/assistance level needed at time of need
   2. in accordance with policyholder’s meant to pay

Key policyholder advantage of cash benefits?

1. gives choice: not necessarily earmarked for particular reasons

Issues for insured

1. risk of windfall payments => need more stringent claims assess

Issues for the policyholder

1. family exploitation => could leave elderly with inadequate care
2. adequacy to meet needs not guaranteed
3. policyholders have little experience of buying care services
   
   • judging price and quality
   • knowing how state-provided care impacts choices
   • insurers may offer management service

Question 17

Variations for long term care insurance contracts:

unit linked (2)

aims (4)

risk charges (2)

Answer 17

1. LTC benefits usually paid out of non-unit fund (represents protection element of fund).
2. Benefits in unit fund at claim time may also be used to pay LTC,or some, or all may be returned to policyholders when fund is protected (representing savings aspect)
3. Aims
   
   1. People rather purchase savings plan
   2. Surrender/death benefit on unit-linked is very attractive
   3. LTC insurance vehicle: lack of death/surrender benefit unattractive
   4. Flexible investment contract
4. Risk charges
   
   1. Monthly risk premium deductions
   2. Cover risk exposure for period, which depends on
      
      1. deferred period
      2. level of protection
      3. current age
      4. benefit amount

Question 18

Variations for long term care insurance contracts:

unit linked

guarantees (2, 3)

Answer 18

1. Gurantees
   
   1. As policyholder ages & risk charges increase (accentuated where benefits also escalate), may be concern that without steady investment growth, unit fund depletes.
   2. If fund is less than risk charge and no guarantees were offered, cover lapses unless more money put into unit fund. Different guarantees available:
      1. No guarantee single premium sufficient: single prem enough to provide lifetime LTC protection
      2. Protection from fixed age: if fund positive at fixed age, no further risk premiums drawn to cover LTC benefits
      3. Full gauranteed: insurer accepts all risk of fund exhaustion. Investment choice restricted to managed/with-profits fund

Question 19

Variations for long term care insurance contracts:

unit linked

claim triggers (6)

Answer 19

1. Claim triggers
   
   1. Often choice
      
      1. Protect fund (all benefits paid from non unit fund, and unit fund returned to policyholder as lump sum). Risk charges higher to pay benefits
      2. Protect initial investment (deferred period depends on difference between FV at claim point and fund protection benefit selected (plus minimum deferred period), calculated according to benefit amound selected
      3. Allowing fund exhaustion (use unit fund to initially pay benefits, then move onto non-unit fund)
   2. Different periods (protection choice=> varying deferred period)
      
      1. Differed period (chosen at outset by policyholder)
      2. Benefit paid from unit fund protection
      3. Benefits paid from non-unit fund

Question 20

What kind of risks are faced by insurers who sell long term care insurance contracts ( 9 )

Answer 20

1. Transfer probabilities
   
   1. Claim inception probs
   2. Transfers between states if multiple states exist under contract
   3. The need to use a typical multiple state model
      
      1. Healthy; needing own home care; needing residential care; needing nursing home care; withdrawn; dead
   4. Transitions
      
      1. Healthy to other
      2. Separately to more intensive home care
         
         1. usually in one direction; needs a state for each level of benefits
      3. Separately to dead
2. Data shortages
   
   1. Difficult to price, underwrite, etc
   2. Need to adjust date for different/differences in
      
      1. populations; behaviour; environment; policy wordings; social attitudes
3. Exploitive claims
   
   1. ADLs don’t always offer enough protection
   2. Difficulty to assess impact of disability
   3. Depends on contract design, underwriting, claims procedures
4. Anti-selection
5. Selective withdrawals
6. Investment risk (significant reserves built up before claim inception)
7. Expense risk
8. Financial risk (negative asset share; withdrawal benefit > asset share)
9. Marketing risk
   
   1. policyholder expect benefits sufficient to cover eventual cost care)
   2. bad for public image, and future business

Question 21

Comment on the capital requirements associated with long term care insurance contracts ( 4 )

Answer 21

1. Comparable to investment contracts e.g.
   
   1. endowment: premiums paid and benefit paid when premiums stop
   2. whole life: no fixed latest time at which claim has to be paid
2. Depends primarily on
   
   1. Nature of contract: unit linked, indemnity, cash benefits, etc
   2. Guarantees: requires increased prudence, hence, larger reserves