An ERM Approach to Long Term Care Insurance Risks

Abstract

Long Term Care risk is recent in the portfolio of French insurance companies. Even after 25 years, it is still considered a new product. The claims data, its development, and the behavior of the insured have only been partially observed. All prudential specifications for reserves and for solvency calculations have not yet been considered for this risk. Solvency 2 brought more economic specifications based on the different inherent risks in both assets and liabilities, using simulated projected cash flows. But Long Term Care is a class of product whose premium is not at this time significant in France and in Europe, and the constraints of this risk are not taken into account in the standard formula. Standard formula stress-tests have not been established for this risk, and application of current stress-tests show costly results for Long Term Care risk. The level of Solvency 2 capital requirements is questionable. The impact of these stress-tests on capital needs is of such significance that it is imperative to find solutions and to outline a management policy to be approved by the top management. This chapter proposes several “Best Practices” for an adequate risk management policy and to develop a risk culture adapted to Long Term Care characteristics.