Private Insurances – A Source for Financing Care for the Elderly

Insurance for private long-term care expenditures faces severe technical problems due to asymmetric information, moral hazard, aggregate risks, and particularly public transfers successfully crowding out private insurance products. Nevertheless, private long-term care insurance offers interesting opportunities to share risks across individuals and over time and thus should be an interesting market as long as instruments to curb adverse selection and moral hazard can be used in insurance contracts. Given the high degree of aggregate risk in the future development of costs for long-term care, a flat payment scheme gradually increasing in the degree of disability looks preferable. This still leaves crowding-out property of public transfers unsolved. A sustainable relief for public finances by private long-term care insurance therefore needs mandatory insurance possibly sold through a public insurance exchange. This exchange could collect premium payments on behalf of the insurance companies and provide an easy framework for the government to directly subsidise low income households. Premium subsidies still imply public expenditures on long-term care but they should be considerably lower as compared to actual spending levels.