A Risk‐Adjusted Analysis of LTC Insurance

ABSTRACT

In this article, 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 broaden our investigation, we construct a risk‐adjusted constant relative risk aversion (CRRA) utility function that enables integrating 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, proposing some numerical evidence.