Serving the Cause of Public Interest Indian Actuarial Profession 24 th India Fellowship Seminar, 2015 Topic : Challenges in pricing long term care for ageing population Guide Name : Mr. Subhrajit Mukhopadhyay Presenters Names : Mr. Ashok Kumar Singh Kushwaha, Mr. Manish Hemnani, Mr. Saurav Rajgaria Date : 10 th December, 2015 Place : Mumbai

Agenda Long term Care (LTC) - Product featuresOpportunitiesChallengesWay forwardSummary

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”. Care can be in their own homes, at a day center, care home setting It is not concerned with curing & alleviating particular condition It is used to treat the results of condition rather than condition itself LTC may be provided informally mainly by spouse & children, or formally on paid basis such as insurance

Long term care Insurance (LTCI) Individual in good health Protection against costs from future deterioration in health Offered as – stand alone, LTC as rider to other policies Pre funded basis People who are just about to go into care or already receiving care. Provisions for future care costs Similar to impaired life annuities Guaranteed regular payments to cover all or part of care cost Immediate care basis Indemnifies cost of care Indemnifies cost of care subject to sum insured limit Cash benefits Benefits

Claims conditions Activities of daily living (ADL) failed or cognitive impairment Benefits paid if the insured failed to perform at least say 3 out of following ADLs  ADLs are : Washing Dressing Feeding Toileting Mobility Continence Cognitive impairment to be confirmed by specialist

Opportunities Source- The Actuary India 35 years in to future : - Working population increase by 20% -Old age population increase by 159% -Increase in the need of old age health care benefits -Dependency on state for old age related benefits would increase.

Opportunities Source- Report, Central statistics office, GOI Large proportion of aged population depends own their own children. Around 6% depends on spouse

Opportunities Absence of state provision Reduction in informal care Increase in longevity Changing family structure

Opportunities Increase in health consciousness Growth of middle class Security, choice, Self dependence & dignity Medical inflation Tax benefits LTCI could address some of this growing needs and opportunities

Challenges Pricing Design Data Assumptions & Modeling Medical Advances Pricing Investment return & Guarantees Profitability Demand Distribution

Challenges Product design can have dramatic impact on the riskiness of the product and have resultant impact on the pricing. There is no past experience. Complexity of product. Benefits types – Indemnity, Cash, Indemnity with upper limit Claims definitions – Single event, multiple event Claims management system for e.g. rehabilitation measures. Product features such as options, exclusions, elimination period, etc. Guarantees in the form of benefits such as indemnity benefits, cash benefits or premium reviewable. Design

Challenges Health products are complex & require significant volumes of data for pricing. Claims & exposure data are key to pricing, however reliable & credible data is always challenge.. Health care data is rarely standardised,often fragmented or generated in legacy IT systems with incompatible formats. If data is not accurate, results in to pricing error for e.g. mis estimation of parameter. Building margins in premium leads to unaffordable premiums, particular concern for old age individual Data which helps predicting the frequency & severity of claims of different causes. Data

Challenges Model assumptions for incidence rates, recovery rates, mortality, utilization rates etc & interaction between variables. Estimating these assumptions is difficult due to limited data. Choice of model & projection period Risk associated with how these assumptions unfold in future time period. Assumption about distribution of claim size, particular concern for indemnity cover. LTCI is prone to both parameter and sampling risk. Risk is concentrated at extreme ages where there is little data or no data. Inflation – uncertainty about both wage & medical inflation Assumptions & Modeling

Challenges Longevity is increasing, people are living longer but potentially in a more disabled state. Surviving in old age will increase claim outgo Trends in costs needs to be factored in pricing. Length of claim could impact cost. Shift in diseases pattern impacting experience of insured population. Genetic testing can indicate an elevated predisposition to particular diseases like multiple sclerosis Genetic testing is becoming widely available and its cost is reducing Increased risk of anti-selection Medical Advances

Challenges LTCI are long term contracts and significant reserves are built. Uncertainty about future interest rate cannot be diversified away, the risk and uncertainty about this product is crucial. Non availability of suitable investments for backing the liability. High roll over risk Risk of asset – liability mismatch Guarantees may have big influence on the level of reserves that have to be established at outset and hence the financing requirement. Investment return & Guarantees

Challenges Uncertainty – parameter estimation & expected claim cost Higher margins in parameters Higher capital requirements Spurious accuracy Increased selective lapses Low business volumes Expense overruns – high set up & maintenance cost. Profitability

Challenges Uncertainty about demand Health Insurance ranks certainly after the basics of food,shelter and clothing. Lack of information/shrouded attributes Misperceptions about need, costs and coverage Myopia Consumer confusion/ product complexity Mistrust of industry / contracts Adverse publicity about current health products undermines customer confidence Challenges in making financial projections for e.g. capital requirements Demand

Challenges Health Insurance products like LTCI are complex to explain to consumers Significant training required for sales channels Higher commission requirements/ fee for selling the business. Increased risk of mis- selling Increased risk of litigations at the time of claims, if customers did not understand the products. Risk of committing the benefits outside the scope of product contract Risk of bringing the insurer to disrepute. Distribution

Challenges Other Policy management systemsReputation riskThird party administratorsFrauds & abuseAvailability of suitable reinsurerVariation in provider services Competition

Market experiences In most developed countries like UK the insurers are struggling to demonstrate profit under LTCI Less demand for LTCI due to more generous state benefits,as well as concerns about affordability Confusion over what would be provided by the state. Large number of companies in these countries left the market in recent years due to key pricing components moving against them Singapore launched the Eldershield programme in 2002 a public- private partnership and it is very successful Programme is designed by the Government, but priced, sold and managed by private insurers International

Way forward Simple policy design e.g. cash benefits Clear Policy conditions Reviewable premiums, bundled product Exclusions, waiting periods, elimination period Medical & Financial Underwriting Complexity, time & cost Expertise Reinsurer’s & Consultants advice Public Private partnership

Summary Long term Insurance provides financial protection against cost of care. Opportunities – ageing population, rising medical inflation, no state benefits etc. Challenges- data, assumptions, medical advances, profitability, guarantees etc. Next steps – Clear policy conditions, reinsurer’s advice, reviewable benefits etc.

Thank you Questions & Discussions