Chapter 3 Long-term care insurance

Question 1

Subject F102 covers various life/health insurance products.

When describing these products, there are key broad characteristics which should be known well. What are these characteristics?

(7 broad groups, with subpoints)

(Note, although this is covered in F102, it may be a useful framework with which to consider the products in F101)

Answer 1

1. Product features
   • description
   • conditions covered
   • benefits given (claim amount, etc)
   • presence of surrender/maturity values
2. Product forms
   
   • rider, standalone, accelerator
   • conventional, with profit, unit linked, index linked
3. Group vs individual
   
   • whether a group version of the contract exists or not
4. Customer needs met
   
   • savings, protection, accumulation
5. Additional special/unique product features
6. Risks to insurer
   
   • Investment, expenses, mortality, morbidity, persistency, selective lapses, anti-selection, moral hazard
   • Overall risks
     
     • financial: business, liquidity, credit, market
     • non-financial: operational, external
   • Aggregation/accumulation of risk
7. Capital requirements
   
   • initial expenses and new business strain
   • asset share and withdrawal risk compared to asset share

Question 2

What is long term care? (7)

What kind of patients/individuals is long term care essentially targeted towards? (1)

Answer 2

Description of long term care

• Long term care is all forms of continuing
  
  • personal care 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

Intended

• LTC is essentially for/targeted towards people who are not going to get better.

Question 3

Describe how long term care (LTC) relates to acute medical care (1)

What are the main aims of LTC? (1)

What are some of the optimal desired outcomes from LTC? (3)

Comment on the importance of medical care in the context of providing LTC (1)

Answer 3

• LTC is distinct from acute medical care, as it is not principally concerned with curing or alleviating particular medical conditions
• Long term care aims to treat the result of the condition, not the condition itself eg
  
  • for patients/individuals who’ve developed a condition that leads to reduced ability to going to bed, washing, personal care, cooking meals, LTC would help such individuals regain enough strength/mobility to be able to do the above activities again…but LTC would not treat the condition leading to said mobility restrictions in the first place.
• Ideally we want LTC to
  
  • help individual regain independence
  • slow down detorioration in health
  • provide necessary care support and environment
• Medical care also important aspect of long term care, where physical/mental breakdown requires doctors/nursing staff. Usually expensive!

Question 4

Describe a long term care insurance contract (7)

Answer 4

• Long-term care insurance is a product providing a benefit to the insured…
• ….to help cover the additional costs of day-to-day living from needing long-term care…
• …due to qualifying events under terms and conditions of their policy.
• The benefit given under a long term care insurance producte may either be a
  
  • cash benefit, or
  • a benefit to indemnify the insured
• In order to control costs there may be limits on payments. In this case the policy does not provide full-indemnity

Question 5

Describe some customer needs which may be met by a long term care insurance product (12)

Answer 5

An optimal long-term care programme

• helps people regain as much independence as possible,
• slow down the rate of deterioration and
• provide necessary care support and environment to maintain wellbeing.

Additional customer needs met by long term care insurance products include

• Finance provision of care/assistance (in old age)
• Financial protection (when a person becomes unable to look after self)
• Protect from insufficient funds/inadequate state care
• Avoid dependence
• Provide comfort (for insured, for insured’s relatives/family)
• Generally doesn’t indemnify
• Helps protect against uncertainty associated with state provided cover
• Inflation protection of care costs (if indemnity)
• Advice on care

Question 6

Describe

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

Answer 6

Costs can be related to

1. ​living:
   
   1. food, clothing, heating, 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/which involves having one’s body touched => issues surrounding intimacy/personal dignity/confidentiality
   2. nursing care: needs knowledge/skills of qualified nurse
   3. intermediary care: focussing on recuperative services acute event (e.g. heart-attack) to reduce hospital admission/minimise dependence on ongoing care

Question 7

Briefly list 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

(4)

Answer 7

• Formal care
  
  • ​Nursing care
  • Intermediate care
• Informal care

Question 8

What do we mean by ‘formal care’? (4)

Give 2 means through which formal care may be provided (2)

Answer 8

Formal care is

• …care provided via professional services either in…
  
  • own home
  • homes near relatives
  • managed residential homes

Formal care may be provided in the form of

• nursing care
• intermediate care

Question 9

Describe what we mean by ‘nursing care’ as a means of ‘formal care’

Answer 9

• Formal care provided via nursing care is the narrowest form of long-term care and can be defined as care that requires the specific knowledge or skills of a qualified nurse.
• At its most restrictive this would require
  
  • technical assessment of healthcare needs and
  • specific interventions that require technical competence and knowledge of disease states, which only a nurse could provide.
• Broader definition might cover costs of registered nurse in providing or supervising care in any setting.

Question 10

Describe what we mean by ‘intermediate care’ as a means of ‘formal care’ (5)

Answer 10

• Intermediate care focuses on recuperative services…
• …following an acute event (eg heart attack, a stroke or an accident) in order to
  
  • reduce avoidable hospital admission, and
  • minimise ongoing long-term care.
• The services should incorporate intensive therapy and support.

Question 11

What do we mean by ‘informal care’? (8)

What factors often influence the provision of formal care? (5)

Answer 11

• What do we mean by informal care?
  
  • Care typically provied by spouses/family/relatives,…
  • …not provided via professional services,…
  • …may be limiited to no more than 4 hours per week…
  • …as a smaller group provides substantial levels of personal care/practical help
  • Often carries indirect cost in terms of
    
    • lost economic activity, or
    • price of replacing the care support should it no longer be provided
  • It should be noted that many of those provision substation levels of care are themselves over age 60. -
  • If the informal care sector shrinks then the demand for insurance products may increase.
• ​Factors influencing formal care
  
  • Culural/religious practices
  • Attituted towards caring for older generation
  • Geographic family dispersion
  • Family structure changes (divorces, re-marriage, lower birth rates)
  • Proportion of working women

Question 12

What are the 2 main types of long term care contracts? (3)

(in terms “timing of funding/paying premiums” compared to “timing of when benefits are paid”)

Answer 12

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 in future. This is not the case for immediate needs long term care contracts

Immediate needs long term care contracts

• purchased by people already in a state of “needing long term care”, and needing to protect against uncertain survival duration in that state

Question 13

Pre funded long term care contracts: discuss the following:

• structure, in terms of the ‘policy being sold by itself’ vs ‘the policy being sold in addition to other policies’ (5)

Answer 13

Structure may either be:

• Standalone: this is the case most of the time
• Rider:
  
  • CI: When added to CI, the policy TPD definition for claims may change at age 60 from “occupation based” to “loss of independent existence” ie failure of certain number of ADLs
  • IP: cover annuities beyond NRA, defs changes from occupation based to activity based
  • PMI: ?
• Accelerator:
  
  • Whole of life: fixed % of sum assured being accelerated when LTC claim definition is satisfied

Question 14

Pre funded long term care contracts: discuss the following

• funding/financing for the care required by the policyholder…ie premiums payable (4)

Answer 14

Funding/premiums for pre funded long term care insurance:

• Usually funded by a single premium
• May be funded by regular premiums, which
  
  • usually increase with chosen benefit increase rate
  • may be level
• Regular premiums paid may be restricted:
  
  • up to certain age eg NRA (normal retirement age)
  • non during specified level of disability e.g. waiver of premium
• Payment for the producte may be funded retrospectively: equity release after sale of home

Question 15

Pre funded long term care insurance premiums: guaranteed terms

Discuss guarantees/reviewability of premiums for pre-funded long term care insurance products (4)

Answer 15

• Long-term care insurers may provide both guaranteed and reviewable products.
• Older people with fixed incomes may choose these options because they cannot afford an additional premium or a reduced benefit after review
• Insurers recognise that for ages 70 to 75 the effectiveness of reviewing is limited and therefore the guarantee has less significance.
• Guaranteed premiums will include a substantial loading compared to reviewable premiums, in order to protect against adverse future experience.

Question 16

Pre funded long term care contracts:

Discuss claims definitions (2)

Claims trigger requirements (3)

Answer 16

• The benefit payment is dependent upon the claim definition, which may be triggered by a single event or by a multiple set of events.
  
  • The single event may be dependent a level of disability and its continuation for a specified period.
• Claims trigger requires
  
  • insured incapable perform certain number of activities
  • without endangering health/wellbeing of themselve or others
  • usually: failure of insured to undertake certain number of ADLs unaided
  • some restrictive plans may require all of the events to be triggered before a payout.

Question 17

Pre funded long term care contracts:

Give examples of ADLs (Activities of Daily Living) which may be used in claims definitions

Consider ADLs related to physical incapacity as well as mental incapacity.

Answer 17

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

Question 18

Pre funded long term care contracts:

Discuss the benefits provided in terms of

Form of benefits (4)

Variations which may exist regarding the benefits given (3)

Answer 18

• Various forms for the benefit may exist, including
  
  • Single lump sum/cash benefit
  • Annuity certain
  • Lifetime benefit (subject to ongoing disability)
  • Restricted benefit subject to ongoing disability (maximum period, or maximum total)
• Benefits may very according to
  
  • The length of deferred period, normally 3 or 12 months.
  • The rate of benefit escalation: normally level, a fixed rate or inflation linked.
  • The length of payment period: normally lifetime or fixed period like 3 years.

Question 19

Pre funded long term care contracts:

Discuss the benefits provided in terms of

Other benefit forms (3)

What happens on early death (1)

Surrender value and paid up value (2)

Answer 19

Other benefit forms/topics

• Plans often provide a fixed number (3 or 6x) of monthly benefits to cover cost of any assistive devices like:grab rails, personal alarms, stair lifts, bathing seats, etc.
• Independant care advice: at claim, help insured understand choices available and right to state suppose
• There is risk of windfall benefits with such a design, as insurance may make payments without any financial loss being incurred.

On death

• Basic single premium products may amortise this premium over 5 years and pay back remaining premium upon death (unlikely for regular premium products)

On surrender/paid up

• Most products do not offer surrender benefits.
• Paid up benefit

Question 20

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 20

• Benefit depends on
  
  1. Level of disabiliity e.g. 50% fail on 2 ADLs and 100% fail on 3+ ADLs
  2. May depend on residence: own vs nursing; not important if inedmnify
• Advantages
  
  1. Care provided at early age if there’s modest imparement
  2. Bettter match customer needs
  3. Percieved 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 21

Immediate needs long term care contracts: discuss the following

Intro (3)

Prodict structure (6)

Premium and how it’s determined (2)

Answer 21

Intro:

• They provide for individuals needing care from their uncertain survival duration, and thereby provide more certainty of their capital costs.
• The insurance provides a guaranteed lifetime income on payment of a single premium.
• Unlike pre-funded plans these have immediacy of need.

Product structure:

• could be: pure endowment, purchased life annuities, disability covers
• structure should consider
  
  • tax position ( of policyholder and life office)
  • regulatory capital required
  • benefit flexibility

Premium:

• Calculated individually, based on health status at purchase
• Premium gaurantees not relevant (for single prem policies)

Question 22

Immediate needs long term care contracts: discuss the following

Benefit form (2)

Benefit level (3)

Death benefit payable (4)

Answer 22

Benefit form:

• Usually some form of impaired life annuity
  
  • secured by single prem at start of contract…
  • …when insured needs care as result of failing ill health

Benefit level:

• Benefgit level may be fixed
• Some plans seek to immunise the insured against escalation clauses to future care costs by pre-agreeing escalation rates, with specified nursing home list
• May increase with worsening incapacity

The policyholder can also select a death benefit payable:

• subject to minimum payment period
• usually just amortises the single premium
• gives capital protection of part of single premium
• higher death benefit => less impact of health status on premium

Question 23

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 23

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)

Didadvantages

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

Question 24

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 24

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 substanital contingency loadings
   
   • leading to far lower reviewed premiums than guaranteed premiums..
   • …may be attractive to policyholders
3. Issues of offering guarnateed 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 25

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 25

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

Question 26

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 26

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 27

Variations for long term care insurance contracts:

unit linked (2)

aims (4)

Answer 27

Intro

• Single premium or regular premium unit-linked long term care insurance products are a further alternative
• It was recognized that a product with no surrender or death benefit is unattractive.
• Unit linked solution aimed to be primarily a flexible investment contract and secondly a long term care product.
• LTC benefits usually paid out of non-unit fund (represents protection element of fund).
• 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)

Aims

• People rather purchase savings plan
• Surrender/death benefit on unit-linked is very attractive
• LTC insurance vehicle: lack of death/surrender benefit unattractive
• Flexible investment contract

Question 28

Operation of a unit-linked long term care insurance product

Premiums (2)

Charges/expenses (3)

Benefits (4)

Answer 28

Premiums

• Policyholder pays a premium (a single premium is more common for this type of policy)
• Most of the premium will be used to buy units and some will go to the insurer’s nonunit fund.

Charges/expenses

• Regular charges are made from the unit fund eg risk charges, fund management charges , policy admin charges.
• Expenses the insurer incurred are paid out of the non unit fund.

Benefits

• Long term care benefits
  
  • LTC benefits will be paid out of the non-unit fund. These represent “protection aspect” of policy.
  • The monies in the unit fund may also be used to pay for long term care benefits.
• Death or surrender
  
  • The benefit paid on death or surrender will be the bid value of the units, from unit fund.
  • Unless there’s a guarantee in excess of unit fund in which case will be paid from non unit fund.

Question 29

Risk charges on Unit-linked long term care insurance products. (6)

Answer 29

Risk charges

• Monthly risk premium deductions which cover the risk exposure during that period
• The risk exposure during each period may depends on
  
  • deferred period
  • level of protection
  • current age
  • benefit amount

Question 30

Variations for long term care insurance contracts:

unit linked

Intro, regarding guarantees (3)

Types of guarantees (3)

Answer 30

Guarantees, intro

• Some plans give guarantee that the single premium would be sufficient to provide lifetime long term care protection.
• As the policyholder ages & risk charges increase (which is accentuated where benefits also escalate), there may be concern that without steady investment growth, the unit fund will deplete.
• If fund is less than risk charge and no guarantees were offered, cover lapses unless more money put into unit fund.

Given the above aspects, the following different guarantees may be available:

• No guarantee, single premium sufficient: single prem enough to provide lifetime LTC protection
• Protection from fixed age: if fund positive at fixed age, no further risk premiums drawn to cover LTC benefits
• Full gauranteed: insurer accepts all risk of fund exhaustion. Investment choice restricted to managed/with-profits fund

Question 31

Variations for long term care insurance contracts:

unit linked

fund proteection and claim triggers (6)

Answer 31

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 32

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

Answer 32

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 33

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

Answer 33

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