Hi, I would like to ask that: 1. Why equity release products (such as lifetime mortgages & home reversions) can be used as "backing assets" for annuities? If I understand it correctly, insurers also face longevity risk from equity release policies, though different nature from that of annuities, e.g. retirees who take lifetime mortgages die or move to residential care home later than expected such that no negative equity guarantee (NNEG) bites 2. How do insurers apply securisation to equity release policy portfolio to be eligbile for matching adjustment when computing BEL & SCR for annuities above? Thank you. Ming Fei Chong
Hi Due to profit loading, the interest rate charged under equity release mortgages is typically higher than the risk-free rate (after allowing for counterparty risk). Therefore the value of such assets can increase under improved longevity - even after allowing for the additional time value of any guarantee. This concept is covered in Q1(ii) of the September 2016 exam so you might find that a useful source. Equity release mortgages can be securitised into tranches, the senior tranche of which would have the characteristics of a fixed interest asset and so could be eligible for the matching adjustment. Hope that helps.
