Long-term care insurance: Knowledge barriers, risk perception and adverse selection

We conduct a stated-choice experiment where respondents are asked to rate various insurance products aimed to protect against nancial risks associated with long-term care needs. Using exogenous variation in prices from the survey design, and objective risks computed from a dynamic microsimulation model, these stated-choice probabilities are used to predict market equilibrium for long-term care insurance using the framework developped by Einav et al. (2010). We investigate in turn causes for the low observed take-up of long-term care insurance in Canada despite substantial residual out-of-pocket fi nancial risk. We first fi nd that awareness and knowledge of the product is low in the population: 44% of respondents who do not have long-term care insurance were never offered this type of insurance while overall 31% report no knowledge of the product. Although we fi nd evidence of adverse selection, results suggest it plays a minimal role in limiting take-up. On the demand side, once respondents have been made aware of
the risks, we find that demand remains low, in part because of misperceptions of risk, lack of bequest motive and home ownership which may act as a substitute.

Keywords: Long-term care insurance, adverse selection, stated-preference, health, insurance

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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