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Natural Hedging In Long-Term Care Insurance

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  • Levantesi, Susanna
  • Menzietti, Massimiliano

Abstract

We investigate the application of natural hedging strategies for long-term care (LTC) insurers by diversifying both longevity and disability risks affecting LTC annuities. We propose two approaches to natural hedging: one built on a multivariate duration, the other on the Conditional Value-at-Risk minimization of the unexpected loss. Both the approaches are extended to the LTC insurance using a multiple state framework. In order to represent the future evolution of mortality and disability transition probabilities, we use the stochastic model of Cairns et al. (2009) with cohort effect under parameter uncertainty through a semi-parametric bootstrap procedure. We calculate the optimal level of a product mix and measure the effectiveness provided by the interaction of LTC stand alone, deferred annuity and whole-life insurance. We compare the results obtained by the two approaches and find that a natural hedging strategy for LTC insurers is attainable with a product mix of LTC and annuities, but including low proportion of LTC.

Suggested Citation

  • Levantesi, Susanna & Menzietti, Massimiliano, 2018. "Natural Hedging In Long-Term Care Insurance," ASTIN Bulletin, Cambridge University Press, vol. 48(1), pages 233-274, January.
    • Handle: RePEc:cup:astinb:v:48:y:2018:i:01:p:233-274_00
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    Cited by:

    1. Martin Eling & Omid Ghavibazoo, 2019. "Research on long-term care insurance: status quo and directions for future research," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 44(2), pages 303-356, April.
    2. Jamaal Ahmad, 2021. "Multivariate higher order moments in multi-state life insurance," Papers 2102.11714, arXiv.org, revised Oct 2021.

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