Dilnot: Reform could stimulate pre-funded insurance market

The report recommended a lifetime cap on care fees paid by the individual of between £25,000 and £50,000, and a separate cap of between £7,000 and £10,000 on accommodation and food fees.

Dilnot's Commission also recommended a £100,000 asset threshold, under which individuals will not have to pay for their care.

The report noted there is a total lack of pre-funded insurance products against social care costs, but said its recommendations, if adopted, may stimulate the pre-funded insurance market.

Partnership was the last provider to offer a pre-funded product, but withdrew it in July 2010 due to a lack of demand.

Providers are reluctant to offer pre-funded products as gauging the long term risk is difficult, the report said.

There is also a lack of demand for pre-funded products, the report said, because people believe care is free, they do not want to face up to the future, and they would rather save for insurance products to be bought at the point of need, such as LTC annuities.

However, if the system of charging and funding for care is reformed, the Dilnot Commission said this could change.

"We have had extensive discussions with the financial services sector and think our proposals would stimulate both supply and demand," the report said.

"By capping the overall risk people face, new financial products could develop to support people in making their contribution.

"These products could be linked to pensions, savings, insurance and housing. Our view is that given the tax-favoured treatment of pensions, ISAs, and housing, these are most likely to be the vehicles used to prepare for social care costs."

Other products likely to be boosted by potential reforms include disability linked annuities, which increase at the point of developing a care need or reaching a certain age, the report said.

Alternatively, the market may favour products linked to property assets, such as equity release, the commission predicted.