Long-term Care Insurance
Sunday, Jan. 7, 2018 10:15 AM - 12:15 PM
- Chair: Hanming Fang, University of Pennsylvania
An Equilibrium Analysis of the Long-term Care Insurance Market
AbstractThis paper uses a model of family interactions to explain why the long-term care insurance market has not been growing. Coverage rates are low and premiums have risen sharply in recent years. I develop and estimate a dynamic non-cooperative model of the family in which parents and children interact over long-term care decisions. Competitive equilibrium analyses of the insurance market show that private information about the availability of informal care limits the size of the market by creating substantial adverse selection. In equilibrium, the market only serves high-risk individuals with limited access to informal care. I also find that children strategically reduce informal care in response to their parents’ insurance coverage. This family moral hazard effect of insurance reduces the insurance demand and increases the formal care risk of the insured, both of which limit the size of the insurance market. I demonstrate that the initial neglect of adverse selection and family moral hazard resulted in substantial underpricing of insurance products. I further show that the decreasing availability of informal care for more recent birth cohorts puts upward pressure on the equilibrium premium. I propose child demographic-based pricing as an alternative risk adjustment that could decrease the average premium, invigorate the market, and generate welfare gains.
Long-term Care Income: Selection, Informal Care, and Precautionary Savings
AbstractWe study the demand for a long-term care (LTC) income product, which pays income in LTC states whether care services are used or not. We conduct an experimental survey where participants divide their (hypothetical) retirement savings between three products: a LTC income product, a life annuity and a liquid investment account. Objective measures of exposure to LTC risk indicate little to no selection effects for the LTC income product. However subjective measures of exposure to LTC risk signal the existence of both adverse and advantageous selection. The LTC income product is more attractive to both participants who perceive a higher risk that they will need LTC and those who are more aware of LTC risk. We find stronger demand for the product among participants who plan to rely on family members for high-level care, evidence that the LTC income product complements high-level informal care. Access to the LTC income product materially affects annuitization choices for around half of participants. The LTC income product allows many people to reduce savings held to self-insure LTC risk and to purchase additional longevity insurance. Participants with lower LTC risk are more likely to do so.
Risky Insurance: Incomplete Markets and Insurance Portfolio Choice
AbstractWe estimate the joint demand for annuities, life insurance, and long-term care insurance in a model with exogenously incomplete markets. Using a new survey instrument, we provide quantitative measures of the perceived, uninsurable risk of policy nonpayment in these insurance markets. Incorporating these measures into our structural model, we quantify how perceived counterparty risk and other sources of market incompleteness, affect the demand for these insurance products. If these products are perceived to be sufficiently risky, agents do not want to purchase insurance products that do not meet their insurance needs. We relate our findings to other studies that have cited puzzles about the lack of late-in-life insurance product (especially annuity) ownership.
- D1 - Household Behavior and Family Economics
- I1 - Health