A Risk-Adjusted Analysis of LTC insurance

In this work, we focus on the dynamic evaluation of expected returns associated with homogeneous portfolios of LTC contracts, which provide benefits in the event of functional dependency. The evolution over time of the possible expected gains/losses of the lender is described by a dynamic stochastic model that accounts for the outflows linked to the contracts within the lender’s portfolio, based on the Net Present Value (NPV) criterion. The year-by-year dynamics of expected NPV is analyzed taking into account the risk associated to the possible randomness of the scenario that may occur during the contract period. The uncertainty due to the correct determination of the suitable technical bases is measured as a model risk, in relation to the degree of reliability associated by the insurer to each table. Our analysis is complemented with an investigation of the subjective view of insurers, accounting for risk exposure, according to personal risk aversion. We perform a risk-adjusted expected utility valuation procedure, which enables to assess the subjective evaluation of expected profit/loss patterns over time and perceived risk due to scenario stochasticity. Our result sheds light on the impact of subjective perception on the decision-making process of insurers as well as on the risk management strategies.