The deferral option in long-term-care insurance

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Long-term-care (LTC) insurance contracts provide the insured with different benefits for several nursing care levels, for a limited number of benefit eligibility periods. A common assumption in pricing these LTC contracts is that the insured will exercise the right to claim benefits as soon as the eligibility conditions are satisfied. This assumption, however, may contradict the insured's optimization, as it might be worthwhile not to claim when in low care levels and, by doing so, save the option of claiming higher (more expensive) care levels in the future. We term this option of the insured as the deferral option. The consequence of the traditional pricing (i.e., of ignoring the deferral option) is unexpected losses to the insurer. The factors affecting the deferral option's value are the risk of death, the discount factor, the benefit levels of the different care levels, and the transition probabilities between the different care levels.

Original languageEnglish
Pages (from-to)101-119
Number of pages19
JournalProbability in the Engineering and Informational Sciences
Issue number1
StatePublished - 2002

ASJC Scopus subject areas

  • Statistics and Probability
  • Statistics, Probability and Uncertainty
  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering


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