Hostname: page-component-7bb8b95d7b-dtkg6 Total loading time: 0 Render date: 2024-09-17T14:39:42.900Z Has data issue: false hasContentIssue false

Pricing and Risk Capital in the Equity Release Market

Published online by Cambridge University Press:  10 June 2011

G. M. Hosty
Affiliation:
Partnership Assurance, Sackville House, 143-149 Fenchurch Street, London EC3M 6BN, U.K. Tel: +44(0)7712789154; Email: ged.hosty@partnership.co.uk

Abstract

Although equity release market sales have been flat since 2003, the market has seen significant developments in terms of product flexibility, with greater levels of guarantees and drawdown schemes, in particular, leading to the reduction in average case sizes. All things being equal, products should have become more expensive for consumers, but the competitive environment which has driven product innovation has also resulted in lower product margins. This is all good for the consumer, but it is increasingly difficult for providers to reach target returns on capital, and this is deterring some prospective new entrants. One of the purposes of this paper is to investigate the profitability of typical schemes in the market at present, and so to address the question of whether competition has forced the market to function at non-profitable levels. In doing this, the paper also provides a benchmark for existing providers and potential new entrants, against which they can check the reasonableness of their own assumptions. We will aim to provide a rational pricing methodology, which can be adopted by any organisation active in the market, and we hope that this can support the market as it expands over the coming years. In order to produce a set of cohesive results, we have modelled a range of potential outcomes using a pricing basis which we consider to be broadly ‘average’. While we would encourage providers to compare our results with their own pricing assumptions, and to ensure that they are satisfied as to the reasons for any differences, there is a health warning, as our results should only be used as a check in this regard. If our ‘averages’ are suitable for use by some providers, then this is just co-incidence. In practice providers should adapt the assumptions made to suit their own product features, target market, expense profile and appetite for risk.

Type
Sessional meetings: papers and abstracts of discussions
Copyright
Copyright © Institute and Faculty of Actuaries 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Booth, P.M. & Marcato, G. (2004). The measurement and modelling of commercial real estate performance. British Actuarial Journal, 10, 573.Google Scholar
CMIB (2002). Working paper no. 1.Google Scholar
CMIB (2006). Working paper no. 20.Google Scholar
Gavrilov, L.A. & Gavrilova, N.S. (1991). The biology of life span: a quantitative approach. Harwood Academic Publishers.Google Scholar
ONS (1997). Focus on social inequalities. Office for National Statistics.Google Scholar
Royal Institute of Chartered Surveyors (2005). RICS European housing review.Google Scholar
SHIP (2006): Press release, 2 September 2006.Google Scholar
The Actuarial Profession (2005). Equity release report.CrossRefGoogle Scholar
Willets, R.C., Gallop, A.P., Leandro, P.A., Lu, J.L.C., Macdonald, A.S., Miller, K.A., Richards, S.J., Robjohns, N., Ryan, J.P. & Waters, H.R. (2004). Longevity in the 21st century. British Actuarial Journal, 10, 685898.CrossRefGoogle Scholar