A Prospective Analysis of LTC Insurance: model risk and subjective utility assessment

The emergence of aging and health deterioration, coupled with in- creasing pressure on global healthcare systems, calls for greater effort from long-term care (LTC) systems. These systems can provide solu- tions that address social needs while promoting collective well-being, aligned with the principles of sustainable finance. In this work, we ex- amine how insurers can dynamically evaluate profits from a LTC port- folio under a forward-looking perspective. In particular, these types of coverage are based on health-related tables and transition probabil- ities, whose determination is complex and subject to a high degree of uncertainty. In order to exhibit the consequences of making an incor- rect choice in terms of technical bases, we built our methodology on a ’risk-adjusted’ procedure and investigate expected profit/loss patterns over time, as well as perceived risk in different valuation scenarios. Additionally, to enables profitability measurement to reflect risk expo- sure, we incorporate model risk into a subjective evaluation, consider- ing CRRA utility functions adjusted for risk.