The Valuation of No-Negative Equity Guarantees and Equity Release Mortgages

Pensions Institute Discussion Paper, PI-1911, September 2019

11 Pages Posted: 16 Mar 2020

See all articles by Kevin Dowd

Kevin Dowd

Durham Business School

David P. Blake

City, University of London

Dean Buckner

affiliation not provided to SSRN

John Fry

Manchester Metropolitan University

Date Written: September 1, 2019

Abstract

We outline the valuation process for a No-Negative Equity Guarantee in an Equity Release Mortgage loan and for an Equity Release Mortgage that has such a guarantee. Illustrative valuations are provided based on the Black ’76 put pricing formula and mortality projections based on the M5, M6 and M7 mortality versions of the Cairns-Blake-Dowd (CBD) family of mortality models. Results indicate that the valuations of No-Negative Equity Guarantees are high relative to loan amounts and subject to considerable model risk but that the valuations of Equity Release Mortgage loans are robust to the choice of mortality model. Results have significant ramifications for industry practice and prudential regulation.

Keywords: Actuarial Science, Black ’76 model, CBD mortality models, Equity Release, No Negative Equity Guarantee, Prudential Regulation

JEL Classification: G2, G3

Suggested Citation

Dowd, Kevin and Blake, David P. and Buckner, Dean and Fry, John, The Valuation of No-Negative Equity Guarantees and Equity Release Mortgages (September 1, 2019). Pensions Institute Discussion Paper, PI-1911, September 2019, Available at SSRN: https://ssrn.com/abstract=3552238 or http://dx.doi.org/10.2139/ssrn.3552238

Kevin Dowd (Contact Author)

Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

David P. Blake

City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZX
Great Britain
+44 (0) 20-7040-8600 (Phone)
+44 (0) 20-7040-8881 (Fax)

HOME PAGE: http://www.pensions-institute.org/

Dean Buckner

affiliation not provided to SSRN

John Fry

Manchester Metropolitan University ( email )

All Saints
Manchester, M15 6BH
United Kingdom

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