The prudential regulation authority has issued an update to its Solvency II: Equity release mortgages consultation paper.
The new publication offers feedback to responses given to the original consultation paper, released in early July of this year, which sought views on how to provide “greater clarity” for insurers and reinsurers when assessing the risk “arising from the no negative equity guarantee”.
Essentially, the consultation paper stated that because equity release redemption payments are funded by property sales, falling house prices are a risk that cannot be avoided, and so insurers must hold adequate capital to cover NNEGs for a scenario where house price growth slows.
An October update confirmed that the original implementation date of any new proposals for 31 December 2018 had been postponed.
In total, there were 27 responses to the consultation paper.
Aside from changing some of the wording to make things clearer, the updated paper confirms that the effective date for the new proposals will be “not before” 31 December 2019.
Further changes explain that the onus will now be on insurers to assess risks relating to equity release mortgages themselves rather than through the PRA’s application of an equivalent of the effective value test, and that the minimum deferment rate should be updated in line with interest rate movements rather than at regular intervals, thereby reducing firms’ balance sheet volatility.
The PRA adds that it intends to consult on additional proposals in early 2019, centred on the structure and assessment on the EVT and how firms should model risks associated with equity release mortgages, including whether or not the EVT should be applied.
In a letter to chief executives, PRA Insurance supervision executive director David Rule writes: “While we have made some changes based on consultation responses, the core of our proposals is unchanged.
“Our strategic goal remains to ensure that the matching adjustment framework remains robust in its application to all eligible assets and to avoid any risk that the credibility of this important element of the prudential framework is undermined. We continue to believe that restructured equity release mortgages are a suitable asset to back annuities as part of an appropriately diversified portfolio.”
Equity Release Council chairman David Burrowes comments: “Having fed into the PRA’s consultation process, we welcome the revisions included in today’s policy statement in addition to the extra time provided to implement its proposals.
“We will seek to work closely with the regulator ahead of 31 December 2019 to ensure that implementation supports this socially important product.”