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Durham Research Online
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Discounting the Discounted Projection Approach.

Buckner, D. and Dowd, K. (2021) 'Discounting the Discounted Projection Approach.', North American actuarial journal. .

Abstract

UK 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 under-valuations of no negative equity guarantees and over-valuations 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.

Item Type:Article
Full text:(VoR) Version of Record
Available under License - Creative Commons Attribution Non-commercial No Derivatives 4.0.
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Status:Peer-reviewed
Publisher Web site:https://doi.org/10.1080/10920277.2021.1916537
Publisher statement:© 2021 The Author(s). Published with license by Taylor and Francis Group, LLC This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License (http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited, and is not altered, transformed, or built upon in any way.
Date accepted:08 April 2021
Date deposited:12 April 2021
Date of first online publication:11 June 2021
Date first made open access:20 August 2021

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