The Life Care Mortgage (LCRM), a bundled product combining a reverse mortgage contract and a long-term care insurance policy, represents an innovative solution to provide income support and longterm care protection for elderly individuals who are financially vulnerable, often lacking liquid resources and struggling to cover the costs associated with functional dependence, while owning their homes (the so-called “house-rich and cash-poor”). Several risks associated with LCRM contracts, such as disability risk, longevity risk, financial risk, and housing price risk, can negatively affect their issuance and sustainability. Appropriate management strategies within an Enterprise Risk Management (ERM) framework are therefore required to detect, measure, monitor, and communicate both current and future risks from the insurer’s perspective, particularly through the use of Quantitative Risk Management (QRM) tools [1, 2]. This study aims to determine the mathematical reserves required for a portfolio of LCRM contracts. In the standard framework, the mathematical reserve for individual policy valuations is calculated using a first-order, prudential basis to discount future benefits and premiums. When the analysis is extended to the entire portfolio, probabilistic assumptions are introducedto describe how the initial portfolio evolves over time. In particular, as the LCRM product involves two regimes — the RM, which applies to all functionally able policyholders, and the LTC, which applies to those who are functionally dependent— the model requires explicit assumptions about the expected number of active contracts in each regime over time. Within this framework, a second-order technical basis reflecting more realistic assumptions about future developments is adopted. The aim is to provide practical insights to improve the risk assessment of LCRM products, thereby enhancing their feasibility, transparency, and potential diffusion within the Italian insurance market.
Life Care Reverse Mortgage: applying actuarial technologies to assess the risks related to non-self-sufficiency
Giovanna Apicella;
2026-01-01
Abstract
The Life Care Mortgage (LCRM), a bundled product combining a reverse mortgage contract and a long-term care insurance policy, represents an innovative solution to provide income support and longterm care protection for elderly individuals who are financially vulnerable, often lacking liquid resources and struggling to cover the costs associated with functional dependence, while owning their homes (the so-called “house-rich and cash-poor”). Several risks associated with LCRM contracts, such as disability risk, longevity risk, financial risk, and housing price risk, can negatively affect their issuance and sustainability. Appropriate management strategies within an Enterprise Risk Management (ERM) framework are therefore required to detect, measure, monitor, and communicate both current and future risks from the insurer’s perspective, particularly through the use of Quantitative Risk Management (QRM) tools [1, 2]. This study aims to determine the mathematical reserves required for a portfolio of LCRM contracts. In the standard framework, the mathematical reserve for individual policy valuations is calculated using a first-order, prudential basis to discount future benefits and premiums. When the analysis is extended to the entire portfolio, probabilistic assumptions are introducedto describe how the initial portfolio evolves over time. In particular, as the LCRM product involves two regimes — the RM, which applies to all functionally able policyholders, and the LTC, which applies to those who are functionally dependent— the model requires explicit assumptions about the expected number of active contracts in each regime over time. Within this framework, a second-order technical basis reflecting more realistic assumptions about future developments is adopted. The aim is to provide practical insights to improve the risk assessment of LCRM products, thereby enhancing their feasibility, transparency, and potential diffusion within the Italian insurance market.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
