Actuarial news and views from Cape Town and beyond

Some of the possible consequences of using incorrect assumptions

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It is extremely important for the provider of any insurance contract to use reasonable assumptions in pricing of the contract because of the many consequences an inadequate premium has on the operations of the company. In this article, one of the consequences of this is explored in the context of long term care (LTC) contracts. This is a relatively new product so when insurers first began pricing LTC policies, they had little comparable experience to use. Over time and with the benefit of hindsight, it has become clear that the LTC industry as a whole missed the mark in their initial pricing assumptions and underestimated factors such as the number of policies that would lapse, the longevity of policyholders, and rising health care costs. As a result, LTC insurers set premiums too low for those older blocks of business and have since sought regulatory approval for rate increases. Not surprisingly, policyholders have fought back.Due to the nature of the benefits that these products offer i.e. costs of care in nursing homes for the elderly, some argue that it is unfair to pass the costs of inaccurate actuarial assumptions to the consumers. What options then, if any, do insurance companies have in such scenarios?



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