Pricing and Risk Capital in the Equity Release Market

Abstract

Although equity release market sales have been flat since 2003, the market has seen significant developments in terms of product flexibility, with greater levels of guarantees and drawdown schemes, in particular, leading to the reduction in average case sizes. All things being equal, products should have become more expensive for consumers, but the competitive environment which has driven product innovation has also resulted in lower product margins. This is all good for the consumer, but it is increasingly difficult for providers to reach target returns on capital, and this is deterring some prospective new entrants. One of the purposes of this paper is to investigate the profitability of typical schemes in the market at present, and so to address the question of whether competition has forced the market to function at non-profitable levels. In doing this, the paper also provides a benchmark for existing providers and potential new entrants, against which they can check the reasonableness of their own assumptions. We will aim to provide a rational pricing methodology, which can be adopted by any organisation active in the market, and we hope that this can support the market as it expands over the coming years. In order to produce a set of cohesive results, we have modelled a range of potential outcomes using a pricing basis which we consider to be broadly ‘average’. While we would encourage providers to compare our results with their own pricing assumptions, and to ensure that they are satisfied as to the reasons for any differences, there is a health warning, as our results should only be used as a check in this regard. If our ‘averages’ are suitable for use by some providers, then this is just co-incidence. In practice providers should adapt the assumptions made to suit their own product features, target market, expense profile and appetite for risk.