A risk-adjusted analysis of LTC insurance

Recent growing awareness of corporate social responsibility makes companies’ role in ensuring equity and inclusion fundamental. In this framework, promoting sustainable long-term care products is crucial. In this paper, we analyze the cash flows associated with a homogeneous portfolio of Long-Term-Care (LTC) insurance contracts, taking into account key sources of risk that may affect the profitability of such products. LTC policies generate long-term positive impacts, both socially and economically, and insurers may actively support the establishment of a fair and sustainable care system. To this aim, managing the impact of the possible risks on the profit flows plays a central role, from the insurer’s point of view. We present a forward-looking actuarial analysis of the time-evolving profitability of the portfolio and analyze the impact of systematic risk resulting from inaccuracies in the estimation of claim frequencies, and explore the sensitivity of financial outcomes to different technical assumptions. To broader our investigation, we construct a risk-adjusted constant relative risk aversion (CRRA) utility function that enables to integrate stochastic variability in claim events hypothesis with the insurer’s personal risk tolerance. We introduce a dynamic risk score that may reflect both contract-specific risk factors as well as wider strategic considerations. Our contribution offers valuable insights to manage financial sustainability, and to analyze strategic decision within the LTC insurances domain.