General questions on equity release plans

[Edward chong]

Hi, I would like to ask that:

1. In general, if an equity release is secured against a property, are there any differences in stringency in the property maintenance requirements (e.g. frequency of insurer inspection, borrowers have to buy a building insurance policy, carry out necessary repairs etc) between a lifetime
   mortgage & a home reversion?
2. For a given property & a given insurer, if a home reversion can relase a bigger share of housing equity than a lifetime mortgage, why is the new business sales volume of the former is dwarfed by the latter? Is there any adviser bias?
3. Can insurers amend property suitability criteria for existing contracts? For example, adding more ineligble property types over time?

Thank you.

 

[Lindsay Smitherman]

Hi Edward

Questions 1 and 3 sound like details that the examiners would not expect knowledge of, going some way beyond what is included in the Core Reading. If you are interested in understanding such details, I would suggest trying to get hold of example policy conditions for such products - you could try looking online.

Bear in mind that a home reversion transfers ownership to the financial institution whereas the mortgage is a loan secured against the property, so this difference may result in tougher property maintenance requirements being imposed for the former.

Also bear in mind that it is very difficult for an insurer to amend an existing contract (presumably this is asked in relation to transferring an equity release mortgage across to another property if the individual wishes to move house?). Making such a change would go against treating customers fairly, unless the original contract was written in such a way as to allow such flexibility - and where this is not deemed to be an unfair contract term.

In terms of your second question, this also comes back to the different forms of the two products. In the case of the home reversion, the customer may find the amount offered for selling % of the property disappointing when compared with % of the current market value of the property, as the amount offered (particularly if rent-free) will typically be at a significantly discounted value. Whereas the perception of the lifetime mortgage is different: it is a loan against the property which the individual basically doesn't have to worry about repaying. Hence the latter can be an easier sell and more popular with potential customers.

 

[Viki2010]

Hi, further questions on Equity Release Mortgages.

1. Are equity release mortgages assets for the insurer? The insurer is buying a property (home reversion) or giving a loan secured on a property (lifetime mortgage). Are these products shown as assets on the SII BS?

2. Is it a common industry practice to use equity release mortgages to construct an asset portfolio for Matching Adjustment purposes against the annuity books? This is what the solution to Q1 of Mock A is suggesting in part (v). But the solution is also mentioning that the products may prove to be ineligible....

3. In theory, would the asset list be limited to the following for the portfolio of assets for Matching Adjustment for immediate, deferred and impaired annuities?
- equity release products
- alternative investments - infrastructure
- corporate bonds
- government bonds
- swaps

 

[ActuaryLad]

Hi

Are equity release mortgages assets for the insurer? The insurer is buying a property (home reversion) or giving a loan secured on a property (lifetime mortgage). Are these products shown as assets on the SII BS?

Equity release is an asset for insurers and are shown as assets on their balance sheets. Equity release can come in many flavours, including the two you have mentioned.

Is it a common industry practice to use equity release mortgages to construct an asset portfolio for Matching Adjustment purposes against the annuity books? This is what the solution to Q1 of Mock A is suggesting in part (v). But the solution is also mentioning that the products may prove to be ineligible....

Insurers want to include equity release into MA portfolios as they can match longer dated cash flows, provide a natural longevity hedge and can make a material contribution to the MA. However, in their natural form, nearly all equity release assets do not meet the matching adjustment eligibility criteria. This is because market risks and surrender risks can make the cash flows uncertain enough to fail the eligibility criteria. To get around this, a common solution for insurers has been to repackage the equity release into an SPV, and only include the senior notes in the MA portfolio. The senior note has the characteristics of a high quality (e.g. AAA) fixed interest bond.

In theory, would the asset list be limited to the following for the portfolio of assets for Matching Adjustment for immediate, deferred and impaired annuities?
- equity release products
- alternative investments - infrastructure
- corporate bonds
- government bonds
- swaps

You have listed the most common assets included in matching adjustment portfolios.

In practice, in the first wave of MA applications, insurers were concentrating on getting approval and so did not try and include more non-traditional asset types. This year many of the insurers that have already got their initial MA approval are now trying to apply to include different asset types that would increase the value of their MA.

Thanks and best wishes
Amit

 

[Viki2010]

Thank you Amit, you are very knowledgeable.

 

[Viki2010]

Hi, the core reading states that capital requirements for equity release products under s2 are stringent. Why is that? Or what requirements are we talking about here if calculating based on srandard formula?

 

[Mark Willder]

Hi, the core reading states that capital requirements for equity release products under s2 are stringent. Why is that? Or what requirements are we talking about here if calculating based on srandard formula?

We covered equity release capital requirements in an earlier thread started on 25 July.

Best wishes

Mark

 

[Sponge]

With equity releasenpriducts being used as an asset in the balance sheet. With regard to work funds, what tier are they in? Tier 3. Will try be suitable to cover SCR but not MCR?