2023 Australasian Actuarial Education and Research Symposium

Kyu Park

ARC Centre of Excellence in Population Ageing Research, University of New South Wales

Developing private long-term care insurance in Australia: Pricing analysis for healthy and chronically ill Australians

This is joint work with Michael Sherris

To establish a private long-term care insurance (LTCI) market in Australia, calculating LTCI product costs requires a reliable actuarial model suited to the local population. Utilising our existing five-state Markov model on functional disability and chronic illness, we estimated premiums for LTCI products, encompassing stand-alone LTCI and life care annuity (LCA), and assessed the impact of these products on an individual’s utility. The model considered factors including age, sex, and (optionally) trend, utilising Australian data from 1998 to 2018. For product design and assumptions, we factored in the comfortable consumption level and aged pension for Australian retirees, and insights gained from our systematic literature review on LTCI pricing methods and outcomes. The calculated premiums include expected benefit payments and the Solvency II capital requirement (SCR). We performed sensitivity analysis on utility measures based on assumptions about individual traits. The stand-alone LTCI was devised to provide a $1,500 monthly disability benefit, capped at $7,600 over a lifetime. The LCA combined a $1,000 monthly annuity payment with the stand-alone LTCI. Premiums showed considerable variation based on retirement illness status, and whether trend factors were incorporated. Estimated stand-alone LTCI premiums comprised 16% to 27% of SCR, while LCA premiums ranged from 7% to 11% of SCR. In many cases, purchasing an LTCI product increased individual's utility, though the degree relied on factors like risk aversion and wealth level. The creation of an Australian private LTCI market requires meticulous attention to population demographics, aging trends, and individual traits.