Multistate Actuarial Models of Functional Disability

Long-term-care (LTC) costs are expected to significantly increase over the coming decades as the Baby Boom generation nears retirement. Recent policy discussions in the United State have focused on expanding the private LTC insurance market so as to alleviate some of the pressure on public programs. An important and fundamental input to the pricing of LTC insurance products is a set of age- and sex-specific functional status transition rates that can flexibly take into account alternative benefit trigger specifications. We apply generalized linear models to evaluate disability transitions for individuals in old age based on a large sample of U.S. elderly. We estimate a multistate model for LTC insurance applications and find significant differences in disability rate patterns and levels between our set of estimates and those separately estimated using an earlier approach developed by the Society of Actuaries. Our results suggest that the elderly face a 10% chance of becoming LTC disabled only at ages past 90, rather than in their 80s. Furthermore, age patterns of recovery are found to differ significantly between the sexes. We also show that these estimates of transition probability are sensitive to the definition of “LTC disability,” which has implications for the design of benefit triggers for private and public LTC insurance programs.