Risk management and regulatory capital requirements in reverse mortgages

Résumé

The demographic and economic structure of developed countries has increased the search for new financing sources for the elderly population. Nevertheless, many of these lowincome people have assets, which means that the reverse mortgage has been one of their main solutions. In recent years, different governments and financial institutions have focused on development strategies, thus showing rapid growth throughout the world. This product expansion has been reflected in the literature related to reverse mortgages, which has also increased significantly. Specifically, the literature has focused on the valuation of some clauses of the contracts from a financial and actuarial point of view but has not gone much deeper into the risk management of reverse mortgages or the regulatory capital requirements of solvency regulations. Precisely, this doctoral thesis addresses the study of reverse mortgages from a risk management perspective. Models are proposed to calculate the risk and regulatory capital requirements of reverse mortgage providers from the perspective of market risk and based on options theory. Monte Carlo simulation techniques are used to estimate the risk incurred by an institution, not only statically through VaR or ES, but also dynamically, by observing the evolution of these measures over the life of the transaction. As a result, both theoretical and empirical results are obtained. These allow reverse mortgage lenders to better understand the risk they face when granting a reverse mortgage. These results also allow risk-based pricing of reverse mortgages, with major favourable consequences for the development and penetration of reverse mortgages.