Design and Pricing of Private Long-term Care Insurance: An Australian Analysis

Kyu Park and Michael Sherris

Abstract: Private long-term care insurance (LTCI) is not available in many countries, including Australia, with individuals relying on government aged care and their own retirement savings to meet aged care needs. We consider the design of private LTCI products to cover individual out-of-pocket aged care costs, assess their pricing using a recently published model of chronic illness and disability in Australia, evaluate the capital costs for insurers and their implications for pricing, and analyse the demand for the products through utility analysis. We consider individuals in good health as well as those who are disabled or with chronic illness and incorporate estimated trends in mortality and disability. Although we focus on Australia, the results have important implications and insights for other developed countries. We consider several LTCI products, encompassing stand-alone LTCI and a life care annuity (LCA). We incorporate public aged care co-payments, a comfortable consumption level and the aged pension for Australian retirees, as well as solvency capital requirement (SCR) based on the Solvency II into our analysis. We also include a systematic literature review of LTCI pricing approaches that informs our analysis. We show how the SCR is significant for the stand-alone LTCI premiums and reduced for the LCA premiums. Our demand analysis illustrates how LTCI products increase individual utility and welfare in most cases and quantifies how this is impacted by product expense loading, risk aversion, wealth levels, and bequest motives.