Actuarial Science series: Calibrating the cost of care

Ageing populations, climate change and poverty create huge risks for society and for the insurance sector. In this new series we look at how Actuarial Science can help tackle these issues.

Humanity is rapidly ageing. By 2030, one in six people in the world will be aged 60 years or over. By 2050, this cohort will have doubled to 2.1 billion, while those aged 80 or older will have tripled, according to the World Health Organisation¹

“The topic is important because the big wave of people retiring today will need care in ten to 20 years. These needs must be evaluated, and care must be organised and financed. This will lead to higher costs for society. So we need to think about these issues now,” explains Joël Wagner, Professor of Actuarial Science at HEC Lausanne.

In many ageing high-income countries, this population time bomb is creating political, pension and social care challenges. This has huge implications for public and private funding, impacting households and insurance. Rising expenditure could become unsustainable over time. It is why there’s pressure on governments to tackle this issue.

Actuarial science plays a crucial role in assessing and managing risks associated with ageing societies. Academics can help decision makers understand the complex interplay between people’s behaviour, investment decisions and social policies, as well as how best to fund healthcare.

A hot topic right now is long-term care and who should pay. “Mutualising costs across society is essential, since some people die quickly and are not costly. Others stay alive longer, their health deteriorates over time and their care becomes expensive. Our research group were one of the first to create dependence tables showing levels of care and costs over time in Switzerland, so insurers and the state could calculate the true price of long-term care,” says Professor Wagner.

The key to research is data. Wagner had access to data from the entire population that received long-term care in the canton of Geneva over the last 25 years. This included information on older people taken into nursing homes, with data on sex, age, medical conditions and time spent in care. He was then able to identify key patterns in care needs over time and model the costs associated with different levels of care.²

Professor Wagner has also found that healthcare expenditure in the last year before death can be an exceptionally costly. Age at death significantly impacts costs as medical claims decrease with age. This is because younger people often receive more hospital care and life-saving treatments.

Hospital stays are a key cost driver, so balancing at-home and institutional care is crucial. When home-cared individuals suddenly need more support, hospitalisation can incur higher costs than long-term institutional care. The findings can help insurers better understand claims and governments better allocate resources.³

“It is essential that as actuaries we inform government policies to fund long-term care and the infrastructure it requires. You also need policy on educating and financing caregivers or whether the state offers subsidies or the private sector organises healthcare through insurance. Actuarial science is a bridge in this process,” details Professor Wagner.

Another component is the purchase of long-term care insurance and what motivates individuals. A Swiss study shows that people with children are more likely to buy insurance to protect their inheritance, while those without children do so due to lacking family support. Individuals with better self-perceived health and right- or centre-leaning political views were also more likely to buy long-term care insurance.

These results highlight targeted campaign opportunities. They also reflect social, cultural and political divides in insurance motives.⁴

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