Health Risks in Old Age – Implications for Household Savings and Insurance

In this thesis, we study heterogeneity in long-term care and mortality risks, and its implications for public and private insurance.

Using Dutch administrative data, we first examine factors affecting the duration of and transitions between formal long-term care use types (home-based or institutional). Compared to having a cognitive impairment, we find that a physical impairment relates to shorter long-term care periods and a more important role for informal care in reducing long-term care use. Additionally, higher financial resources and homeownership delay long-term care use, indicating a potential demand for private long-term care options.

Next, we study adverse selection within private annuity- and long-term care insurance markets. Although combining these insurances can mitigate selection problems when the risks of survival and long-term care are negatively correlated, our findings indicate that this is insufficient to fully address selection problems. While we find negatively correlated risks across socioeconomic groups, group-specific pricing is necessary for bundled annuities and long-term care insurance to undo selection problems.

Furthermore, we study to what extent socioeconomic differences in long-term care and mortality shape the welfare distribution in the Netherlands. We find that higher socioeconomic status households experience higher welfare than those with lower socioeconomic status because they receive pensions for a longer period, have a shorter nursing home stay, and can leave larger bequests.

For our studies, we extended existing duration models to simultaneously allow for left truncation and unobserved heterogeneity. Our findings highlight substantial biases when these factors are erroneously accounted for.