Climate Considerations for Long Term Care
By Nathan Worrell
Long-Term Care News, November 2022
Recently the SOA released a report titled “Climate Risk Analysis for Life and Health Insurance Companies,” which summarized the discussion points from a two-hour expert panel discussion. The objectives of this discussion were as follows:
- Discuss current challenges with climate risk analysis for life and health insurance companies
- Discuss considerations for potential qualitative and quantitative approaches for modeling climate risks for use in multiple actuarial responsibilities
- Discuss ways to reflect and adjust assumptions, trends, offsets and climate data to assess the direct and indirect impacts, as well as compound effects across multiple scenarios
- Suggest effective communications and disclosures of climate-related information to various stakeholders amidst high uncertainty
This article reviews the main elements of the panel discussion and asks the question, what does this mean for long-term care (LTC) carriers?
Current Challenges
Uncertainty/Purpose
The complexity of climate interactions makes this an inherently difficult risk to quantify, a situation not unique to LTC carriers. However, one key item may be “. . . whether the impacts of climate risks would be larger than what is already captured in solvency and capital regimes.”
One driver of LTC capital may be the present value of future claims. A consideration for carriers may be to take a look at how long-term care claim trends connect to climate trends. How this can be done, and whether there is enough meaningful data will be discussed in a later section of this article.
Scenarios
According to the report, “integrating climate risk considerations into traditional analysis seems justified not only for worst-case scenarios but also with best estimate assumptions.”
As climate scenarios become more mainstream, it will be key for insurers to understand what the various narratives mean for their business. For instance, to what degree will care facilities face increased costs to support carbon neutrality?
Data and Attribution
The report states, “Attribution is possible with reliable data. Yet, from a mortality and morbidity perspective, coding on medical claims may not often be granular enough to allow for the interconnectedness between climate risks and the medical condition, mortality status or cause of death. In addition, while there may exist some techniques to differentiate excess mortality caused by extreme weather from natural volatility and exacerbated by comorbidities, some challenges remain when attempting to attribute mortality or morbidity to a single extreme weather event for a particular area over a defined timeframe.”
What sorts of geographic data are collected by insurers? How resilient or exposed are nursing home facilities to extreme weather events (when were they built, do they have generators, what is their elevation, etc.)? How much of an insurance portfolio includes home-based care that could face hurricane risk in Florida? What about wildfire risk in California? Are claims occurring within a few months of a weather event traceable?
Modeling Climate Risk
Assumptions
LTC carriers already face an intricate set of assumptions: incidence, claim recovery, claim utilization, active and disabled mortality, and possibly mortality or morbidity improvement assumptions. Each of these impacts the economic view of the portfolio in unique ways. For instance, a mortality shock may be a favorable event for a book of LTC business.
How should these assumptions relate to climate? Winters are already hard on the LTC insured population. Cold weather brings more sickness, risk of falls and impairments to cognitive health. If climate change brings more volatility to climate extremes, even if the general trend is for warmer temperatures, harsh cold snaps may be particularly severe for LTC populations. On the other side of the coin, if more retirees flock to Florida, California or Texas, how might extreme heat impair morbidity and mortality trends?
Another example may be the recent research from the SOA on tick-borne illness trends increasing with warmer climates. Something like Lyme disease can have long-term implications to claim trends.
Given the sensitive nature of some LTC assumptions, even if developing reliable data and assumptions on climate is successful, potentially small variances could cause material swings in model results, further increasing model risk.
Adjustments and Trends
As mentioned earlier, climate risk is complex, and there are often second-order events. In addition, many panelists mentioned the need to focus on complex relationships, including migration patterns. For example, while climate-related events like the melting of glaciers contributes to sea level rise that later can accelerate population movements away from some coastal areas, a prolonged drought impacting food security could also later trigger political turmoil, economic instability or even war prompting massive population displacement. These population movements can create long-term changes in the demographic profile of insurers, and appropriate monitoring should be implemented to foresee such changes, if possible, or at the very least, monitor its evolution and their interdependencies over time.
How would migration or displacement affect the supply of care facility workers? Does proximity to care centers affect claim recovery?
Mitigants and Offsets
Severe events create demand for adaptability, such as improved building codes resulting from natural disasters and readiness of response teams in a given calendar year.
In particular, the first major shock of the year typically causes the greatest damage relative to follow-on events of comparable severity causing fewer damage.
However, the effectiveness of mitigations may also require close monitoring. Air conditioning may provide relief from extreme heat, for example, but does that mitigant work if the electric grid fails?
Panelists discussed portfolio offsets between mortality and longevity risk. Within LTC, how do parallel increases in incidence and mortality interact?
Climate Risk Variables
Long-term care insurers share the same challenges as other carriers to identify and quantify the nuances of climate risk. As the insurance industry incorporates more climate data and analysis, LTC providers can likely adopt best practices.
Disclosures
Specifics of disclosures are yet to be determined; however, the expert panel identified the following elements of disclosures:
- Relatable—Analogy with local, tail events to increase relevance to primary audience
- Wide range of scenarios across plausibility spectrum—These include favorable and unfavorable or catastrophic scenarios; leveraging Intergovernmental Panel on Climate Change (IPCC) scenarios
- Meaningful metrics—Multiple options possible based on audience: impact on earnings, claims or reserves
Like the rest of the insurance industry, LTC actuaries will need to think about and plan for the additional time and energy required to develop, maintain and produce the disclosures.
Conclusion and Opportunities
The LTC portfolio presents unique challenges for climate risk analysis. The demographic and geographic elements of the insured population are certainly key to the risk assessment. Furthermore, the wide array of assumptions all have unique interactions with climate. Yet, there is still space for opportunity.
The panel considered certain opportunities that will extend to LTC providers:
- New types of policies, benefits and products that respond to the needs of tomorrow and account for vulnerabilities.
- What sort of innovations might the LTC community develop—displacement protection? property and casualty (P&C) riders?
- Can the LTC industry make progress in reducing protection gaps?
- Increase collaboration between private insurance companies and public entities like municipalities and other levels of government.
- If private/public partnerships increase to address climate concerns, could other concerns (perhaps aging) be addressed in concert?
As a last thought, actuaries in the LTC space may be well suited to be pioneers in climate considerations for portfolio management and assessment. The product sits at the confluence of life and health. Furthermore, facing complex challenges is nothing new to these professionals. The industry has had to navigate rate increase approaches and low interest environments, while still trying to innovate with new plan designs like hybrid/combination plans. Developing a comprehensive, holistic view of climate impacts will present new difficulties, but there are also opportunities for new insights and approaches. Will LTC lead the way?
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.
Nate Worrell, FSA, is a client support actuary with Moodys’ Analytics. He can be contacted at nathan.worrell@moodys.com.