Modeling Long Term Care Insurance

Seth J,. Chandler

University of Houston Law Center

Abstract

Long term care insurance in the United States and elsewhere provides benefits to individuals whose physical or severe cognitive disabilities render them unable to perform the basic activities of daily living such as eating, toileting or dressing. Notwithstanding the sale of this sort of insurance to over 8 million individuals in the United States, public actuarial literature on the subject is limited and fewer models are available for study by regulators of this product than is the case for somewhat comparable products such as life insurance. This talk will show how Mathematica can be used to model long term care insurance and to assess government regulation of that product. It focuses on computation of reserve values—the amount by which insurers would benefit in the event a policy lapsed—and compares them to the value provided to policyholders pursuant to "contingent non-forfeiture laws" in the event of such lapse. Initial work on the subject suggests that the law has been extraordinarily protective of insurer solvency, effectively compelling policyholders to bear the risk of inadequate pricing while failing to provide a protective governance structure. Techniques used in this talk will include Markov chains and numeric solutions to differential equations as well as use of Mathematica's dynamic interactivity features.