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The valuation of no-negative equity guarantees and equity release mortgages

Dowd, K.
; 
Buckner, D.
; 
Blake, D.
; 
Fry, John
Publication Date
2019-11
End of Embargo
Supervisor
Keywords
Actuarial science, Black '76 model, CBD mortality models, Equity release, No-negative equity guarantee, Prudential regulation
Rights
© 2019 Elsevier B.V. All rights reserved. Reproduced in accordance with the publisher's self-archiving policy. This manuscript version is made available under the CC-BY-NC-ND 4.0 license.
Peer-Reviewed
Yes
Open Access status
openAccess
Accepted for publication
03/09/2019
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Department
Awarded
Embargo end date
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Management and Law Publications
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Abstract
We outline the valuation process for a No-Negative Equity Guarantee in an Equity Release Mortgage loan and for an Equity Release Mortgage that has such a guarantee. Illustrative valuations are provided based on the Black ’76 put pricing formula and mortality projections based on the M5, M6 and M7 mortality versions of the Cairns–Blake–Dowd (CBD) family of mortality models. Results indicate that the valuations of No-Negative Equity Guarantees are high relative to loan amounts and subject to considerable model risk but that the valuations of Equity Release Mortgage loans are robust to the choice of mortality model. Results have significant ramifications for industry practice and prudential regulation.
URI
http://hdl.handle.net/10454/17567
Version
Accepted manuscript
Citation
Dowd K, Buckner D, Blake D et al (2019) The valuation of no-negative equity guarantees and equity release mortgages. Economics Letters. 184: 108669.
Link to publisher’s version
Link to published version
Link to Version of Record
https://doi.org/10.1016/j.econlet.2019.108669
Type
Article
Qualification name
Notes