SII capital strain ‘key risk’ for insurers holding ERMs

Written by Adam Cadle

16/03/2020

Solvency II (SII) capital strain resulting from adverse house price movements or a revision of house price inflation assumptions is a key short-term risk for insurers with equity release mortgages (ERMs) in their asset portfolios, Fitch Ratings has said.

“This capital strain, which may not adequately reflect the change of the long-term underlying No Equity Guarantee (NNEG) risk, reduces the overall capital flexibility and is therefore negative for the ratings of insurers holding large balances of ERMs,” it added.

“We view NNEG risk as largely mitigated by the conservative borrower age to loan-to-value (LTV) profile of insurers' ERM books. These profiles imply that substantial losses would require a sustained and severe (by historical standards) long-term decline in UK house prices.

“We believe that the combination of borrower age and LTV on a portfolio of mortgages is a robust indicator of the risk of losses. Our analysis shows that a small shift in the age/LTV mix can result in a significant change in the expected value of shortfalls. A weakening age/LTV profile on a portfolio of loans could therefore result in ERM writers' ratings being downgraded.”

Related Articles