De-risking long-term care insurance

In this paper we propose a de-risking strategy model for LTC insurers facing with longevity and disability risks, by constructing hedge positions with vanilla disability swaps and options. We rely on long term care insurance in a multiple state framework. The optimal hedge level for each de-risking strategies is computed respectively by minimizing the total cost of the de-risking strategy under the Conditional Value-at-Risk constraint on the total unfunded liabilities and minimizing the Conditional Value-at-Risk under a total cost constraint. A numerical application is performed and the results suggest that a de-risking strategy based on disability derivatives can be a viable solution to reduce the portfolio riskiness of LTC insurers.