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  #31  
Old 01-27-2019, 10:54 AM
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Older folks also don't want to move from their family home, specially if they have kids.

What you might see is older folks wanting to leave their house to their kids (inheritance), but then go the ERM route as they need cash to maintain their lifestyle (they would not inform their kids of this), and when they die the insurer only owns a proportion of the house. The kids then scream bloody murder as they didn't know, and they accuse the insurer of taking advantage of their old and frail parents. And then you get costly court action.
That's why a sensible insurer will make the potential heirs acknowledge the lien when it is placed.
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  #32  
Old 01-27-2019, 11:40 AM
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That's why a sensible insurer will make the potential heirs acknowledge the lien when it is placed.
You could do that. But then again, it increases new business strain as you have to find, and communicate with these potential heirs. If you make it compulsory in the loan contract (that heirs need to be informed), a lot of older folks will balk at that (thus hurting sales).
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  #33  
Old 01-27-2019, 12:29 PM
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You could do that. But then again, it increases new business strain as you have to find, and communicate with these potential heirs. If you make it compulsory in the loan contract (that heirs need to be informed), a lot of older folks will balk at that (thus hurting sales).
Make it part of the contract. It will become an industry best practice. A few companies won't follow suit at first, but think about the anti-selection that they are bringing upon themselves: their extra sales will be to families that don't want their children to know that they took out some of their equity --- my guess is that these are the families that will end up suing anyway.
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Old 02-12-2019, 07:58 AM
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From my observations in the UK, very few people maintain their home to a decent standard. Looking at rentals in London can be an absolute horror show to be perfectly honest.
Aviva have been running a few blocks of these in a structured thing since 2001 , seem to have been getting rather low values for the properties on sale (Sale Price as % of Indexed Valuation (Initial Valuation + Halifax Hpi) ~ 50% for the oldest blocks )
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  #35  
Old 02-13-2019, 11:59 AM
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Good spot. Let me see if I understand. We value the house at 100,000 (for example) in 2001. Then we work out how much the house would be worth now, based on the Halifax HPI numbers. Finally, we look at the actual sale value of the property at exit.

Then we find the house hasn't gone up nearly as much as we assumed? Is it because it is a complete wreck?
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Old 02-13-2019, 12:43 PM
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Good spot. Let me see if I understand. We value the house at 100,000 (for example) in 2001. Then we work out how much the house would be worth now, based on the Halifax HPI numbers. Finally, we look at the actual sale value of the property at exit.

Then we find the house hasn't gone up nearly as much as we assumed? Is it because it is a complete wreck?
The house, the housing market, or both?

As noted earlier in this thread, I expect we've seen this movie before.

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Old 02-14-2019, 07:51 AM
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Good spot. Let me see if I understand. We value the house at 100,000 (for example) in 2001. Then we work out how much the house would be worth now, based on the Halifax HPI numbers. Finally, we look at the actual sale value of the property at exit.

Then we find the house hasn't gone up nearly as much as we assumed? Is it because it is a complete wreck?
Could be because its falling down, could be because the initial valuation was over-optimistic, could be the type of houses occupied by ERM customers under performing the index, could be related to the circumstances of the sale (certainly hear anecdotes about getting properties cheap because the owner just died in it which ERM rather selects for).

Either way it does suggest that the current value of the underlying is a little less certain than would be ideal, let alone the future growth.
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Old 02-14-2019, 08:22 AM
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Aviva have been running a few blocks of these in a structured thing since 2001 , seem to have been getting rather low values for the properties on sale (Sale Price as % of Indexed Valuation (Initial Valuation + Halifax Hpi) ~ 50% for the oldest blocks )
This does not surprise me. ERMs got popular in the rush for yield when IRs went down to the zero bound, but people did not do a proper study on how to properly model them. The sort of studies you see in private debt (infrastructure loans and commercial mortgage loans) where simply not conducted here to any great extent. I see a lot of potential long-term losses for insurers who jumped in early on the ERM bandwagon.
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Old 02-14-2019, 08:48 AM
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Could be because its falling down, could be because the initial valuation was over-optimistic, could be the type of houses occupied by ERM customers under performing the index, could be related to the circumstances of the sale (certainly hear anecdotes about getting properties cheap because the owner just died in it which ERM rather selects for).

Either way it does suggest that the current value of the underlying is a little less certain than would be ideal, let alone the future growth.
The type of people that get ERMs are income poor (on average)

That means they have a higher probability of not spending money on the maintenance of their property. This would then impact the final sale price.

It would be an interesting study to conduct: linking in incomes of a potential ERM buyer, with maintenance costs, in order to examine the volatility of the ultimate sale price. My assumption here (based on what I have seen to date) is that the Actuaries assumed that people would spend more money on maintenance (thus keeping the value of the house within a certain range relative to an an index). The reality is that older folks in the UK tend to be much more negligent about maintaining a house once they get a loan for it.
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Old 02-21-2019, 10:54 AM
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I took a closer look and it is more complicated than it seems.

Aviva only report when the NNEG is triggered. So if you read the quarterly reports, you will see a section called 'Cases', which covers all cases where the sale price falls below the accrued loan.

So we have an interesting puzzle. We can see the tail of a large distribution, conditional upon the guarantee being triggered, and we know the sale value as a % of the index value, and as a % of the loan value. We don't know the corresponding figures for the rest of the distribution.
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