Cognitive abilities and long-term care insurance: evidence from European data

Abstract

Long-term care (LTC) is one of the largest financial risks faced by the elderly. Yet, it remains largely uninsured. This paper explores the relationship between cognitive abilities and private voluntary or supplementary long-term care insurance (LTCI) ownership as another possible factor contributing to the small size of the market. We used data from a European panel survey, which collects detailed information on both private insurance coverage and three indicators of cognitive abilities: numeracy, verbal fluency and memory skills. We find that memory, but not numeracy or verbal fluency, has a positive and statistically significant effect on the probability of owning private LTCI above and beyond other characteristics such as general education, family, risk factors, income and wealth. Fixed effects estimates show that a one-standard deviation increase in the recall measure score is associated with a 0.5 percentage point increase in the probability of holding insurance for the baseline sample and a 1 percentage point increase among the younger cohort. The findings suggest that cognitive limitations in LTCI decision-making are likely to be linked to information processing skills and can be an important factor affecting the expansion of the market that need to be taken into consideration in policy design.

Appendices

Appendix 1

Measures of LTCI and cognitive abilities in SHARE

LTCI

The generic question on long-term care insurance is: ‘Do you have any of the following public or private long-term care insurances?’ If the question is unclear, interviewers are instructed to provide a follow-up explanation: ‘Long-term care insurance helps covering the cost of long-term care. It generally covers home care, assisted living, adult daycare, respite care, hospice care and stays in nursing homes or residential care facilities. Some of the long-term care services might be covered by your health insurance’. Respondents are provided with a list of possible answers and can report one or more of the following answer categories: ‘Public’, ‘Private mandatory’, ‘Private voluntary/supplementary’, ‘None’.

Cognitive abilities

Numeracy

SHARE includes a series of five sequential subtractions for respondents to ask. The question is as follows: ‘Now let’s try some subtraction of numbers. One hundred minus 7 equals what? And 7 from that?’. The question ‘and 7 from that?’ is repeated up to the fifth subtraction. The numeracy indicator is the sum of the correct number of subtractions.

Verbal fluency

The verbal fluency indicator is based on the following question: ‘I would like you to name as many different animals as you can think of. You have one minute to do this.’ The verbal fluency score then is the sum of acceptable animals. Any member of the animal kingdom, real or mythical is scored correct, except repetitions and proper nouns. Specifically each of the following gets credit: a species name and any accompanying breeds within the species as well as any male, female and infant names within the species.

Recall

To measure memory SHARE includes the following question: ‘Now, I am going to read a list of words from my computer screen. We have purposely made the list long so it will be difficult for anyone to recall all the words. Most people recall just a few. Please listen carefully, as the set of words cannot be repeated. When I have finished, I will ask you to recall aloud as many of the words as you can, in any order. Is this clear?’. The memory indicator is the sum of all words recalled within a minute. In waves 5, 6 and 7 respondents were randomly assigned to one of four sets of ‘ten words list learning’. A delayed recall question is also asked whereby the interviewer comes back to the recall question after a while asking respondents to list any of the words they can still remember.

Alternative numeracy measure

The SHARE survey asks the following questions that are used to construct the second numeracy index:

• 1. If the chance of getting a disease is 10% how many people out of 1000 would be expected to get the disease? Possible answers: 100; 10; 90; 900 and ‘other’.

• 2. In a sale, a shop is selling all items at half price. Before the sale a sofa costs 300 euro. How much will it cost in the sale? The possible answers: 150; 600 and ‘other’.

• 3. A second hand car dealer is selling a car for 6000 euro. This is two-thirds of what it costs new. How much did the car cost new? Possible answers: 9000; 4000; 8000; 12,000, 18,000 and ‘other’.

• 4. Let’s say you have 2000 euro in a savings account. The account earns 10% interest each year. How much would you have in the account at the end of two years? Possible answers: 2420; 2020; 2100; 2400 and ‘other’.

The final numeracy measure is constructed as follows. If question (1) is answered wrongly then respondents are asked question (2). If it is answered correctly respondents are directed to question (3). If both questions (1) and (2) are wrong then the numeracy score is 1, which is the lowest possible. If question (1) is wrong while question (2) is correct then the score is 2. Those respondents that answer question (1) correctly are taken to questions (3) and (4). If question (3) is wrong then the score is 3. If questions (1) and (3) are correct but (4) is wrong then the score is 4. If all questions (1), (3) and (4) are correct then the score is 5, which is the highest possible score.

Appendix 2

See Table 9

Table 9 Market statistics on LTCI across countries