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The Actuary The magazine of the Institute & Faculty of Actuaries

ARC considers alternative models for Equity Release Mortgage calculations

The Institute and Faculty of Actuaries' (IFoA) Actuarial Research Centre (ARC) has proposed a new model that better reflects historic UK house prices for equity release mortgage calculations.

New equity release mortgage modelling ©Shutterstock
New equity release mortgage modelling ©Shutterstock

Outlined in a new report, the sophisticated model is also said to be more sensitive to underlying risks than current calculations, and could produce more robust valuations.

This comes after the IFoA found that financial guarantee estimates may be “overstated” in some scenarios, but that the valuations arising from insurers’ models and bases are “sufficient”.

President, Jules Constantinou, said: “This report moves us significantly further forward in applying the latest sophisticated statistical methods for modelling the guarantees.

“It is important to remember that different models are appropriate for different purposes.

“Equity release mortgages can help to provide crucial funding for a growing elderly population by releasing funds for home improvement or meeting care costs.”

“In light of the growing use of these products as investments underlying annuity portfolios by insurers, it is essential that insurers set aside adequate reserves and capital for the valuable guarantees they are offering.”

Equity release mortgages enable retirees to release wealth stored in their home as cash in the form of a lifetime mortgage, which is repayable on death or entry to long-term care.

The University of Kent carried out the latest research, but was assisted by a joint review group from the IFoA and Association of British Insurers (ABI) to provide quality assurance.

ABI assistant director, Steven Findlay, said: “Equity release mortgages currently make up only a small proportion of the assets that insurance companies hold – but we expect this will gradually increase.

“The research is a valuable contribution to an important debate on the most appropriate treatment for these assets on insurers’ balance sheets – and should be of use to practitioners in the actuarial profession, regulator and industry alike.”

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