Securitization of Longevity Risk in Reverse Mortgages

30 Pages Posted: 30 Jan 2008

See all articles by Liang Wang

Liang Wang

UNSW Business School

Emiliano Valdez

University of New South Wales (UNSW) - School of Actuarial Studies

John Piggott

University of New South Wales (UNSW) - Australian School of Business, School of Economics

Date Written: December 1, 2007

Abstract

The reverse mortgage market has been expanding rapidly in developed economies in recent years. The onset of demographic transition places a rapidly rising number of households in an age window where reverse mortgages have potential appeal, and increasing prices for residential real estate over the last decade has further stimulated interest.

Reverse mortgages involve various risks from the provider's perspective which may hinder the further development of these financial products. This paper addresses one method of transferring and financing the risks associated with these products through the form of securitization. Securitization is becoming a popular and attractive alternative form of risk transfer of insurance liabilities. Here we demonstrate how to construct a securitization structure for reverse mortgages similar to the one applied in traditional insurance products. Specifically, we investigate the merits of developing survivor bonds and survivor swaps for reverse mortgage products. In the case of survivor bonds, for example, we are able to compute premiums, both analytically and numerically through simulations, and to examine how the longevity risk may be transferred to the financial investors. Our numerical calculations provide an indication of the economic benefits derived from developing survivor bonds to securitize the "longevity risk compoent" of reverse mortgage products. Moreover, some sensitivity analysis of these economic benefits indicates that these survivor bonds provide for a promising tool for investment diversification.

Keywords: Longevity risk, reverse mortgages, securitization

JEL Classification: D91,G22, G23, J14

Suggested Citation

Wang, Liang and Valdez, Emiliano and Piggott, John, Securitization of Longevity Risk in Reverse Mortgages (December 1, 2007). Available at SSRN: https://ssrn.com/abstract=1087549 or http://dx.doi.org/10.2139/ssrn.1087549

Liang Wang

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Emiliano Valdez

University of New South Wales (UNSW) - School of Actuarial Studies ( email )

Sydney NSW 2052, ACT 2600
Australia

John Piggott (Contact Author)

University of New South Wales (UNSW) - Australian School of Business, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

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