Solvency II - Surprises In Store For LTC Carriers
Europe’s new Solvency II supervisory framework is intended to introduce more sensitive risk management and solvency capital requirements for insurers across all classes of business. But it is hard to see how the rules, slated for introduction in 2014, will work for long term care insurance.
Different variants of the LTC product are available in markets like France, but it is still a relatively recent addition to insurers’ portfolios in the context of its long duration and lack of significant claims experience.
That fact alone probably makes LTC unsuitable for the Standard Formula offered by Solvency II. The alternative, to use a bespoke so-called Internal Model, is not much better as that too requires much market data to do with life expectancy.
We’ve examined two different approaches to risk modeling and capital requirements – the reduced portfolio approach and the future premium approach, to find out which might work for LTC. Although the latter produced the best results, both approaches created much higher regulatory capital requirements than is currently the case.
So what are the implications for the nascent LTC market of a sizeable increase in capital requirements under Solvency II? Premium increase, less benefit revaluation, management fees being updated, plus greater reinsurance demand are potential outcomes. But perhaps more important - in view of the big capital hikes in store - is the overall change of risk culture that Solvency II will demand from European LTC carriers.
For more on the upcoming Solvency II rule changes, read the article written by my co-author Néfissa Sator and myself in our Risk Insights publication.