The Poor Perception of Longevity and Dependency Risks Alone Does Not Explain the Weakness of the LTC Insurance Market (in Canada)

M. Martin BOYER * Professeur, HEC Montréal, Montréal, Canada.

Philippe DE DONDER ** Directeur de recherches, CNRS, Toulouse School of Economics.

Claude FLUET *** Professeur, Université Laval, Québec, Canada.

Marie-Louise LEROUX **** Professeure, Université de Québec, Montréal, Canada. Contact : leroux.marie-louise@uqam.ca.

Pierre-Carl MICHAUD ***** Professeur, HEC Montréal, Montréal, Canada.Philippe De Donder remercie l'ANR (ANR-17-EURE-0010, Programme Investissements d'Avenir) et la Chaire « Marché des risques et création de valeurs, fondation du risque/Scor ». M. Martin Boyer, Claude Fluet, Marie-Louise Leroux et Pierre-Carl Michaud remercient le SSRHC-CRSH pour la subvention Savoir sur « la protection contre les risques financiers à la retraite » en lien avec les travaux de recherche mentionnés dans cet article.

This article studies some of the reasons underlying the small market for LTC insurance in Quebec and Ontario. Using 2016 survey data, we explain that misperception biases alone regarding demographic risks (of mortality and of dependency) cannot explain the weak demand for such an insurance product. To be specific, even if individual perceptions of these risks are fairly uneven, individuals tend on average to overestimate their survival probability and the probability of entering a retirement home, which should lead to purchasing too much LTC insurance rather than too little. We argue that the most probable reason for the weak demand for LTC insurance is that individuals are not familiar with this type of financial product. Therefore, if policymakers wish to encourage the purchase of LTC insurance, we recommend ad campaigns to inform potential policyholders about the existence of such products. Another approach would be to develop combined insurance products.