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New research considers alternative models for Equity Release Mortgage calculations

New independent research jointly commissioned by The Institute and Faculty of Actuaries (IFoA) and the Association of British Insurers (ABI) investigates alternative approaches for modelling cashflows for Equity Release Mortgages. These products 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, with no requirement to make monthly payments to pay interest or repay capital.

Equity release mortgage providers offer a valuable guarantee to the customer that they will never have to pay back more than the house is worth when sold (the “No Negative Equity Guarantee”). The new research is a significant step forward in evolving current published thought on alternative models for valuing this guarantee, using the latest academic techniques.   

The research was carried out by the University of Kent with a joint IFoA/ABI Review Group overseeing the project and providing quality assurance. The results are detailed in the report published today: “UK Equity Release Mortgages: a review of the No Negative Equity Guarantee”. The research suggests that current financial estimates of the guarantee might be overstated in some scenarios. However, the modelling also suggests that valuations arising from insurers’ current models and bases are sufficient. It proposes a new, more sophisticated model which more accurately reflects historic house price movements and is more sensitive to the underlying risks.

IFoA President, Jules Constantinou, said:

“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 under the products.  As calculations around Equity Release Mortgages are extremely complex, we felt the time was right to further research the models currently in use.

On commissioning this joint research, the IFoA and the ABI have sought to provide an independent, professional view on potential models for valuation, capital and pricing purposes. 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 helping to overcome shortfalls in retirement income, or to refinance debt or release funds for home improvement or meeting care costs.”

Steven Findlay, Assistant Director, Head of Prudential Regulation, Association of British Insurers said:

“Equity release mortgages currently make up only a small proportion of the assets that insurance companies hold – but as demand grows we expect this will gradually increase. The research published today 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.”

 Gareth Mee, Deputy Chair, Life Research Committee, IFoA said:

“Our key objective in commissioning this research has been to put forward appropriate methods for determining Equity Release Mortgage cashflows and their value. We recognise there are a range of models that can be used but we wanted to apply academic rigour to assess which models are the best fit for calculating the guarantee. This research offers an alternative model to more accurately reflect how residential property prices have moved.”


Sonia Sequeira, Media Relations Manager
Tel: 07525 592 198

Notes to Editor

  1. UK Equity Release Mortgages: a review of the No Negative Equity Guarantee. University of Kent. February 2019.

About the Institute and Faculty of Actuaries

The Institute and Faculty of Actuaries (IFoA) is a royal chartered, not-for-profit, professional body.

Research undertaken by the IFoA is not commercial.  As a learned society, research helps us to fulfil our royal charter requirements to further actuarial science and serve the public interest. 

Actuaries provide commercial, financial and prudential advice on the management of a business’s assets and liabilities, especially where long term management and planning are critical to the success of any business venture. They also advise individuals, and advise on social and public interest issues.

Members of the IFoA have a statutory role in the supervision of pension funds and life insurance companies. They also have a statutory role to provide actuarial opinions for managing agents at Lloyd’s.

Members are governed by the Institute and Faculty of Actuaries. A rigorous examination system is supported by a programme of continuing professional development and a professional code of conduct supports high standards reflecting the significant role of actuaries in society.

The IFoA is available to provide independent expert comment to the media on a range of actuarial- related issues, including enterprise risk management, finance and investment, general insurance, health and care, life assurance, mortality, and pensions.

About the Association of British Insurers

The Association of British Insurers is the voice of the UK’s world leading insurance and long-term savings industry.

A productive, inclusive and thriving sector, we are an industry that provides peace of mind to households and businesses across the UK and powers the growth of local and regional economies by enabling trade, risk taking, investment and innovation.



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