De-risking long-term care insurance
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In this paper, we propose a de-risking strategy model for LTC insurers facing with longevity and disability risks, by constructing hedge positions with vanilla disability swaps and options. We rely on long-term care insurance in a multiple state framework. The optimal hedge level for each de-risking strategies is computed, respectively, by minimizing the total cost of the de-risking strategy under the Conditional Value-at-Risk (CVaR) constraint on the total unfunded liabilities and minimizing the CVaR under a total cost constraint. A numerical application is performed, and the results suggest that a de-risking strategy based on disability derivatives can be a viable solution to reduce the portfolio riskiness of LTC insurers.
KeywordsLong-term care insurance De-risking Disability risk Conditional VaR minimization
This study was not funded by any profit or non-profit organization.
Compliance with ethical standards
Conflict of interest
The authors declare that there is no conflict of interests.
This article does not contain any studies with human participants performed by any of the authors.
Informed consent was obtained from all individual participants included in the study.
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