Natural hedging strategies in long term care insurance
Long term care (LTC) insurance, a product which protects insureds against future costs to be incurred due to a chronic or disabling condition, has reached a global relevance due to the increased number of elderly in the world, which generate a higher demand for LTC services. In these contracts, the presence of risk elements such as the uncertainty in future disability and mortality rates exposes LTC insurers to potential unexpected losses. The development of effective risk management strategies can help insurance companies to underwrite LTC policies, resulting in lower premiums and leading to the expansion of the market.
In this talk, we will present natural hedging strategies for LTC insurers by examining the effects of portfolio diversification, which is essential for the purpose of risk management. Two approaches are proposed: one built on a multivariate duration, the other on the Conditional Value-at-Risk minimization of the unexpected loss.