Understanding the value of a first principles modeling approach to LTC insurance

In the past five years, many long-term care (LTC) insurance carriers have moved from a claim cost model approach to a first principles model approach to create business projections and perform cash flow testing.

A first principles approach allows a company to study policyholder behavior in more detail and understand policy migration over time. It breaks down assumptions for policy behavior (e.g., incidence rates, claim termination rates, and utilization) to their components and models them. In contrast, a claim cost model composites these three assumptions before entering them into the model. Although actuaries still develop assumptions in aggregate, this approach allows companies to understand individual policy performance better.

In this paper, Milliman’s Nicole Gaspar, Alyssa Lu, and Juliet Spector discuss modeling and the information that companies can glean from a first principles approach.