Transition Probabilities As Applied In Actuarial Calculations Of Long Term Care Insurance Products

Abstract

Long term care refers to services provided to persons who, for one reason or another are unable to carry out activities of daily living. In developing models for pricing LTC insurance products, actuaries have applied, among other approaches, multiple state models. The current project seeks to construct a ve-state multiple state model (allowing for recoveries) that depicts LTC needs at di¤erent ADL failure levels and can be used in Actuarial calculations of premiums and reserves. We begin by introducing the study of multiple state models using Markov approach.Calculation of transition intensities for the ve-state model is then done. We use a matrices approach to calculate transition probabilities from the calculated transition intensities and conclude by illustrating how the calculated transition probabilities can be applied in actuarial calculations of premiums and reserves.