Market Readiness of Long-Term Care Products in Asia-Pacific Markets
By Lanqi Cheng, Xinran Luo and Yingqi Zhang
Long-Term Care News, April 2024
Editor’s Note: This article comprises the executive summary and introduction from the SOA research paper Market Readiness of Long-Term Care Products in Asia-Pacific Markets, published in December 2023.
Executive Summary
The purpose of this study is to provide valuable insights and recommendations for insurance companies that are considering entering the market of commercial long-term care insurance (LTCI) in the Asia-Pacific, based on individual health status. The study reviews the development of LTCI in the main markets in the Asia-Pacific, drawing conclusions about market experiences and offering inspiration for product development. We have also proposed two sample products and completed product pricing and profit testing to identify key risk drivers.
Section 1 of the study reviews and analyzes the social long-term care (LTC) system and the development of commercial LTCI in main markets in the Asia-Pacific. The study also addresses the challenges of commercial LTCI product development and key considerations for insurance companies.
In section 2, two baseline products with cash payout are proposed based on analyzing market features in the Asia-Pacific. The incidence rate assumption is derived from the population census data. A first principles approach is used for modeling. Product pricing and profit testing, including sensitivity testing, are conducted based on the two proposed products. The study identifies the main risk drivers for LTCI products and provides suggestions for product design and risk mitigation measures.
Key Takeaways
- LTCI products are challenging for insurance companies due to the involvement of more assumptions, the lack of credible experience data for determining these assumptions, the need to balance risk with eligibility determination and claim investigation practices.
- The role of the local government and the government-led social LTC system in the local market is crucial to develop commercial LTCI products as they promote public awareness and also provide referable assessment results.
- In markets where critical illness (CI) insurance dominates the health insurance market, it’s important to distinguish between LTCI and CI business. Otherwise, LTCI requiring pre-defined illness may overlap with CI coverage in the view of policyholders.
- For product features, the benefit with cash payout enables more flexible choices. The benefit term is recommended to be longer than 10 years but no more than to age 100, to balance acquisition expenses and risks of very old ages. As the benefit is usually paid consecutively, it is recommended to consider how to ensure that paid benefits at least cover paid premiums. Incorporating related care services into the product is also considered attractive, although this raises the necessity for service management within the company.
- Based on the sensitivity testing, investment income, LTC incidence rate, recovery rate and expenses including service expenses are significant risk drivers affecting profit margin results. The business mix such as average sum assured, and age composition is also an important factor in generating satisfactory profits.
- To mitigate risks, the payout duration cap and the deferment period[i] should be incorporated.
In this report, assumptions and methods that are as universally applicable as possible have been utilized in our modeling. However, it’s important to note that assumptions may vary significantly among different companies in different markets. An Excel spreadsheet accompanies this report for readers interested in inputting their assumptions to investigate the results.
Introduction
The aging population is a global issue for many regions. The World Population Prospects report shows the rapid growth of the aging population in the Asia-Pacific. Japan has already evolved into a super-aged society.[ii] Apart from the growing elderly population, the fertility rate[iii] has been constantly declining. In regions such as Hong Kong, the total fertility rate has dropped below 1. Low fertility rate further accelerates the pace of population aging, reduces family population and thus increases the pressure for families and societies.
The delivery of long-term care services is one of the solutions to support an elderly’s daily life with dignity. For the insurance industry, LTC insurance provides financial support for service delivery. In this study, LTCI refers to the insurance offering LTC services, cash benefit payouts or reimbursement mainly for the elderly who are unable to live an independent life. In some markets, LTCI is combined with disability insurance (DI). DI provides income compensation for the insured unable to work and targets younger people before retirement. DI is usually related to the insured’s previous occupation and salary, while LTCI aims to cover LTC services costs and offer financial support. This study focuses on LTCI, and DI is beyond the scope.
Although local governments in the Asia-Pacific have established complete or partial public LTC systems in the form of social welfare or insurance with the goal of achieving the long-term care delivery, the public system usually covers only basic needs. It is unsustainable for the public system alone to cover all LTC-related needs. Public-private partnership is the key to providing more comprehensive coverage that meets various needs. It thus leads to the market opportunity of commercial LTCI. In the Asia-Pacific, the market development stage of commercial LTCI varies among different regions due to different reasons.
Unlike conventional insurance products, the development of LTCI presents more challenges. More assumptions are involved, and reliable experience data is usually inaccessible for most markets. More status transitions of the insured require more accurate modeling. Apart from these technical difficulties, the moral hazard risk resulting from less objective assessment and benefit incentives imposes challenges to claim investigations and settlements. Therefore, thorough consideration and evaluation should be completed before an insurance company develops an LTCI product.
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.
Lanqi Cheng, ASA, is a pricing actuary at Huize Holding Limited in Shanghai. Lanqi can be reached at rachel_cheng777@qq.com.
Xinran Luo, ASA, is an assistant manager at Manulife-Sinochem Life Insurance Co., Ltd., in Shanghai. Xinran can be reached at xinranluo1992@163.com.
Yingqi Zhang, FSA, is a pricing manager at China Pacific Life Insurance Co., Ltd., in Shanghai. Yingqi can be reached at tracyyoungzhang@163.com.