Category: ERM

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Arbitrage Problems with Reflected Geometric Brownian Motion

Good news!

 

Our article, “Arbitrage Problems with Reflected Geometric Brownian Motion” by Dean Buckner, Kevin Dowd and Hardy Hulley, has just been accepted for publication by the prestigious journal Finance and Stochastics.

The abstract of the article states:

 

Contrary to the claims made by several authors, a financial market model in which the price of a risky security follows a reflected geometric Brownian motion is not arbitrage-free. In fact, such models violate even the weakest no-arbitrage condition considered in the literature. Consequently, they do not admit numeraire portfolios or equivalent risk-neutral probability measures, which makes them totally unsuitable for contingent claim valuation. Unsurprisingly, the published option pricing formulae for such models violate classical no-arbitrage bounds.

 

What this means in plain English is that our friend Guy Thomas’s article “Valuation of no-negative-equity guarantees with a lower reflecting barrier” in the Annals of Actuarial Science in 2020 is wrong, dead wrong.

Continue reading “Arbitrage Problems with Reflected Geometric Brownian Motion”

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Potential equity release mis-selling?

We were also quoted in the Telegraph yesterday on potential equity release misselling.

Kevin Dowd, professor of finance and economics at Durham University, said misselling is “always a risk” with commission-driven sales and the equity release sector “has a less than stellar record in this area”.

Dean Buckner, policy director of UK Shareholders Association, formerly of the Bank of England, said ideally struggling homeowners would downsize to a smaller property and invest for a better income, adding: “Instead, they are being encouraged to take out equity release at currently high rates.”

Mr Buckner said homeowners were at risk of being sold loans that were not appropriate to them. He said: “There is a temptation for financial advisers not to dwell on these aspects, and providers should think carefully about how this could be viewed as mis-selling by future regulators.”

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IFOA Thematic Review Report on Equity Release

The Institute of Actuaries report on  Equity Release is published today.

It opens “Actuaries have played a leading role in developing the market for equity-release products”. From my memory, the role that actuaries played in developing the product was an active resistance to developing a correct pricing model, but never mind.

The report found, astonishingly, that “actuaries view much of equity-release pricing and proposition work as (technical) actuarial work, in common with valuation and capital activity”.

Unsurprisingly, the extensive bibliography did not include  The Eumaeus Guide to Equity Release Valuation: Restating the Case for a Market Consistent Approach, 2nd edition. KSP Books.

 

 

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More Trouble at t’ Equity Release Mill

Last week’s (4 October 2022) Daily Telegraph had a nice article by Charlotte Gifford on the impact of higher loan rates and a possible house price fall on the equity release sector:

Equity release market in trouble as rates rise and house prices wobble

‘It will all come crashing down’, warns economics professor

It’s worth a read.

In essence, higher rates and a possible house price fall are not good news for the sector. Says the econ professor “if the Bank Rate hits 6pc and house prices fall by 15pc, then the loss to the lender is … 28 percent of the loan. If house prices fall even more, by 40pc, then the loss would be … 41percent of the overall loan.”

But then again, the ER people are still pretty upbeat, so perhaps it will all go away.

We noticed a couple of flies in the ointment, however.

Continue reading “More Trouble at t’ Equity Release Mill”

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Two New Books by EUMAEUS

Two New Books by EUMAEUS

Eumaeus is pleased to announce the publication of two new books published by KSP Books. Regular readers will be familiar with draft versions of both these.

The first is The Eumaeus Guide to Equity Release Valuation: Restating the Case for a Market Consistent Approach, 2nd edition. The second is Can UK Banks Pass the Covid-19 Stress Test? Both were published on June 29th.

We thank Bilal Kargi of KSP Books for publishing these.

More publications are in the works and we will report on them as they come out.

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Actuaries and equity release mortgages

The Institute of Actuaries’ “Review Team” has launched an Equity Release Mortgages thematic review, “which will consider the work carried out by actuaries in this area – in particular their role in propositions and pricing activity. The market for equity release mortgages continues to grow, and actuaries have an important role to play in this broad and complex area.”

The review includes a questionnnaire for lenders and a questionnaire for consultants. (Academic researchers apparently are not included).

The questionnaires are focused on the governance of ERM work. Example: “In addition to providing documentation, please describe what examples of documentation are subject to APS and/or TAS assessment (in either valuation/capital functions or propositions/pricing functions) at your organisation.”

Which reminds me, if the TAS (Technical and Actuarial Standards) were any use at all, they would have picked up the massively incorrect valuation method used by most (if not all) firms. This suggests they are not any use at all.

Just saying.

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On the Profitability of ERM Loans

We are grateful to the editor of the African Journal of Estate and Property Management for publishing our latest article on the profitability (or rather, lack thereof) of ERM loans to lenders. The article is available here:

“On the Profitability of Equity Release Mortgage Loans.” (K. Dowd and D. Buckner) African Journal of Estate and Property Management. September 2021.

Continue reading “On the Profitability of ERM Loans”

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Just Group flogs off more ERMs

Phoenix Group acquires £300m equity release portfolio from Just Group. “Consolidates Phoenix’s position among the largest equity release funders. Equity release is an important option for people planning their finances later in life” blah blah. Add that to the £334 million they sold off to Rothesay, and that’s a substantial part of their portfolio. Also, as we commented here,  the deal will probably cause more losses for Just, as they lose the MA ‘benefit’.