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A study of the HEC Montreal calls into question the potential of the long-term care insurance

by

Alain Castonguay

8 January 2018 07:00

Pierre-Carl Michaud | Photo : Emily Tournevache, UQAM

It is well known that the long-term care insurance was slow to win adherents. A university research chair has just published a study that reveals that this product has the potential to reach 25% of the population.

Pierre-Carl Michaud, professor, department of applied economics at HEC Montréal, is one of the authors of this research paper with his colleague Martin Boyer, for the account of the Industrial research Chair Alliance on the economic issues of demographic change. He has delivered major lines of the insurance Journal, prior to the unveiling, which took place a few weeks after the interview.

To Mr. Michaud, the insurance market for long-term care offers new business opportunities to the industry. But in Quebec and Ontario, the proportion of customers who could be attracted by the idea to hold this cover is not so high, » he said. The Chair believes that the demand for insurance products in long-term care affects approximately 25% of the population. If it is true that the need to fill is a concern for a large majority, «there is a large work of education and major implications for public policy,» he said.

The adverse selection

The risk of ending her life in a specialized institution in need of personal care is a probability too distant to the person who has many more years on the labour market. Insurance long-term care is not an easy sell, but the product still exists.

When customers express interest in this product, usually at the approach of their retirement, the insurer may presume that there’s a good chance that the customer should know a little more about his state of health. Thus, the probability of the risk occurring are stronger.

«When you make econometric analyses a bit further, to detect this problem of adverse selection, we see that it moves the request for the balance of approximately three percentage points. Even if we solve this problem, it is not a big difference, contrary to what some people expected, » says Mr. Michaud.

The main reason for their interest to subscribe to such a policy is to leave money to his relatives, he adds. The potential customer does not want to leave their family to adjust to higher expenditures in health care.

The demand for insurance in long-term care is lower for people who are owners of their residence. «It is a bit normal. The house becomes in any way a form of insurance. If they need to go in an establishment of long-term care, they can sell the residence and use the capital gain to fund their new needs, » he said.

Offers absent

The authors of the study asked the participants what was the main reason explaining their lack of interest for the insurance for long-term care. Among the people who do not show interest for the product, more than half of them reported : «I was never offered. I have never been spoken. «

According to professor Michaud, a possible explanation comes from the supply side. «Maybe the industry doesn’t offer because it is a product which is difficult to estimate. Or because it is not enough to pay for advisers and brokers, » he says.

It is also possible that the product is not offered simply because the advisors know that the customer demand is not there. If the advisor only has 30 minutes to talk with his client, it is likely that he would prefer to offer other insurance products and savings, he adds.

For a place in a CHSLD, there is currently approximately $ 2,100 per month for a private room, or a little more than $ 25,000 per year. For people who do not have a pension plan, the benefit paid by the Régie des rentes du Québec and the federal benefit of income security so that the amount to be paid from personal savings is not so high.

«Of course, if you do not have enough resources, the contribution which is demanded of the person decreases. If people have just the money that comes from State benefits, the pricing environment in a CHSLD is adjusted accordingly to the drop «, he adds.

Not of interest for the wealthy

People with very low incomes, the very rich, and therefore are not really interested in the insurance long-term care. The retired workers who receive a pension plan believe that they will be able to pay for the hosting to their retirement income through an annuity, for example.

As potential clients, there remain those who have accumulated savings or assets, but who have done so primarily to bequeath it to their loved ones. «It may be people who do not have employer-sponsored pension plan, but they have significant assets. They say that the $ 25,000 per year, if they have to pay it for two or three years, they prefer not to eat into their assets and want to leave more to their children. «The market potential remains, therefore, focused enough, said Mr. Michaud.

Maintaining the home : the key to success

In terms of benefits of maintaining the home, the products offered by canadian insurance companies are interesting, because they are more based on a benefit paid to the insured. It can be used both for long-term care in NURSING homes, in a private institution or at home. In the font that the Chair has been able to analyse, the coverage is simply based on the diagnosis of limitation or disability. Providers can even be used to compensate the children who help them at home. Different arrangements are possible, the products are already flexible.

«In the United States, there is more to the repayment of expenses. Some of them are eligible and will be reimbursed. This system is not well suited to the supply of home care «, explains the professor.

However, the existing products may be combined with savings or a life insurance policy. «People say : why I would put the money for it if I have no need for it at the end ? One can think of combining life insurance with insurance for long-term care. It is well, you are going to pay me this amount in benefits if I need long-term care. If I die early, before you need it, you pay an amount to my beneficiaries «, and cites he example.

In the context of the study of the Chair, different combinations have been analysed and submitted, but it «did not increase the demand so considerable,» said Mr. Michaud. Maybe just because they’re still talking about a context that hypothetical. If you tried it for real with the existing customer base, it could have interesting effects. This however, does not seem to arouse enthusiasm when they are used in combination «.

The public component of insurance long-term care is still very present in the minds of consumers. In addition to the benefits already mentioned for seniors and retirees, there is a provincial tax credit for home assistance, which allows the repayment of 34 % of eligible expenses. The maximum eligible amount of expenditure is of 19 500 $. The maximum rebate is thus 6 630 $. These amounts are for a single person. They can be double if both members of a couple have over 70 years of age.

Funding challenge

It’s also important not to overlook the fact that the beneficiary pays only a part of the real cost, which is 5 000 to 6 000 $ per month. Therefore, we cannot say that the citizens do not have confidence in long-term care, since the tax revenues to pay for this gap, said Mr. Michaud.

The researchers of the department work also to measure the impacts of the ageing population and the funding needs, in the context where the number of elderly people is increasing, as is their life expectancy. According to Mr. Michaud, the group aged 85 years and over is the one that shows the growth in numbers the fastest.

«The costs, that is one thing. The growth of the costs of structural related to health care, we do not yet know. When the demand is going to explode, if it hasn’t built enough schools, we must turn from the public to the private. It is not known what will happen with prices in the private sector. The cost of the accommodation would begin to grow so rampant, » notes the professor Michaud.

As the new facilities build to be managed by the public or the private, we can guess that it will cost more expensive than to provide services aimed at maintaining seniors in their home. «Home care, that is what everyone hopes for. We all want that it takes the expansion and it becomes very efficient to provide this assistance at home. It is less expensive to everyone, including the insurers, individuals and the government. «But this solution is not simple either, he adds.

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