Long-Term Care Insurance Pricing Models

Multi-State Framework for LTC

Long-term care (LTC) insurance covers nursing home, assisted living, and home health care costs. The natural modeling framework is a multi-state model with states: healthy, requiring care (possibly with sub-levels by severity), and dead. Transition intensities govern movements between states. Key features include the dependence of claim rates on age, duration of disability, and prior claim history. Benefit triggers typically require inability to perform a specified number of activities of daily living (ADLs) or cognitive impairment.

Pricing Considerations

LTC pricing must account for claim incidence rates, claim duration and recovery rates, benefit utilization patterns, and inflation protection options. Morbidity risk is harder to predict than mortality risk due to limited historical data and changing care patterns. Premiums are calculated by equating the APV of premiums to the APV of expected benefits plus expenses, using multi-state transition probabilities. Lapse rates significantly affect pricing: low voluntary lapse rates mean the insurer retains policies through high-claim ages. Exam LTAM tests the multi-state framework applied to LTC and disability products.