The benefit of life-extending medical treatments to life insurance companies has a direct benefit as they lower the insurer's liabilities by delaying the death compensation into the future and increasing premium income.The question that Koijen and Van Nieuwerburgh (2020)[1] ask is if these situations drive toward the integration of life and health insurance markets. Rapid medical advances have produced new treatments that result in significant improvements in the survival ratio for patients. A major drawback, however, is that many of the new life-extending therapies are expensive. Patients may not be able to afford the copay for the drugs in addition to the cost of medical insurance. However, this has a side effect: life expectancy raises and pushes the payment of the death compensation back into the future. Also, Long-term care insurers can benefit from effective treatments that lower the likelihood that a policyholder needs expensive care late in life, such as a prolonged stay in a nursing home. This value creation can help finance the cost of care for patients with life insurance. In the future, life-extending medical innovation may lower the cost of life insurance, stimulate the development of new life-extending treatments, and redraw the boundaries between life and health insurance. On the contrary, pension funds are compromised by the increase in life expectancy, paying pensions for more years. Adjusting pensions for life expectancy reduces replacement rates when mortality rates fall as expected. This should be partly offset by longer working careers. Another, more interventionist position, is the application of a tax to life insurers to subsidize health insurance and pension funds.


[1] Koijen, R. S., & VanNieuwerburgh, S. (2020). Combininglife and health insurance. The Quarterly Journal of Economics, 135(2),913-958.

 

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