Design and pricing of private long‐term care insurance: An Australian analysis

Abstract Private long‐term care insurance (LTCI) is unavailable in many countries, including Australia, where individuals rely on government support and retirement savings for aged care. This study explores the design and pricing of private LTCI products covering out‐of‐pocket costs, using a model of chronic illness and disability in Australia. We assess insurer capital costs and pricing implications, incorporating trends in mortality and disability. Demand is analysed through utility models for healthy and chronically ill individuals. Our analysis includes stand‐alone LTCI and life care annuity (LCA) products, considering public aged care co‐payments, comfortable consumption, the age pension, and Solvency II requirements. A systematic literature review informs our pricing approach. We show that capital requirements significantly increase stand‐alone LTCI premiums but are lower for LCA products. Welfare analysis demonstrates welfare gains from LTCI across scenarios, influenced by expense loading, risk aversion, wealth, and bequest motives. Findings offer insights for Australia and other developed countries.