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Adverse selection in a start-up long-term care insurance market

Published online by Cambridge University Press:  19 November 2014

C. Adams ,
C. Donnelly  and
A. Macdonald
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Abstract

Common to all previous studies assessing the cost of adverse selection associated with genetics has been the assumption of an established market, i.e., the adverse selectors have been buying insurance at that rate for such a period that premiums have already absorbed it. Their analyses involve calculating the percentage difference between premiums in a market with adverse selection and one without adverse selection. They can shed no light on how the premiums would get to this stage over time and what losses might be incurred in the process. We take the modelling further by outlining a multiple state Markov model for a start-up market of long-term care insurance. With this model, we explicitly show the progression of adverse selection costs using the development of information that an insurer would gain from analysing the claims history of its existing business, to reprice premiums for new business. To overcome the complication of insurance benefit amounts, which depend on the value of previous benefit payments, we develop a simulation approach of estimating the expected present values of insurance benefits and premium payments. In applying our modelling to a UK setting, we find genetic testing of the apolipoprotein E gene (whose variants can cause a high risk of developing dementia) to be of a relatively small impact compared with our hypothetical state of intermediate dementia progression. Furthermore, we find that the government’s cap on care costs has little effect on adverse selection costs as it benefits only a small proportion of people.

Keywords

Genetics and InsuranceAdverse SelectionLong-Term CareAlzheimer’s Disease
Type
Sessional meetings: papers and abstracts of discussions
Information
British Actuarial Journal , Volume 20 , Issue 2 , July 2015 , pp. 298 - 347
Copyright
© Institute and Faculty of Actuaries 2014 

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