Abstract
U.K. equity release actuaries are using a flawed approach to value the no-negative equity guarantees in their equity release mortgages. The approach they use, the discounted projection approach, incorrectly uses projected future house prices as the underlying prices in their put option pricing equations. The correct approach uses forward house prices. The discounted projection approach entails significant undervaluations of no-negative equity guarantees and overvaluations of equity release mortgages and can produce valuations that violate rational pricing principles. The discounted projection approach is also inconsistent with both actuarial and accounting standards. Our results have significant ramifications for equity release industry practice and prudential regulation.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.