Valuation of Equity Release Contracts in Czech Republic, Republic of Poland and Slovak Republic

Abstract

An ageing European population and, therefore, a rising dependency ratio of retirees to the working population, strongly suggests that a pension funding gap will be a key social issue in future. Yet many older people have significant real estate assets that they could access using equity release products. They could sell their assets in exchange for lifelong or temporary monthly payments. Equity release products are relatively new to Poland, but are not yet offered by commercial banks in Czechia and Slovakia. This paper estimates the potential benefits of marriage reverse annuity, and reverse mortgage contracts, using the Svensson model function, and empirical property data from selected Czech, Slovak and Polish cities. The results are also compared to the average pension of inhabitants in the selected cities. It is shown that there is substantial scope for boosting retirement income in all the cases considered, though the precise size of the increase depends on factors such as contract buyers' age and life expectancy, the value of their assets, the payment consequences of a spouse's death, and contract suppliers' pricing policies.

Actuarial Mathematics and Risk Management

“…Based on 2005 data, researchers have observed that respondents used housing equity in various ways to help plan their finances. Since 2005, more people are aware that a possible method for funding the expenses associated with old age is through the use of equity release contracts (Marciniuk et al 2020). Retirees are asset-rich and cash-poor; therefore, their housing wealth can be used to supplement their retirement income.…”

“…The new product consists of two elements, namely, the reverse annuity contract and the dread disease insurance. One of the equity release forms similar to the home reversion scheme is the reverse annuity contract (Marciniuk et al 2020). The benefits derived from the new product can help improve the living conditions and the quality of life for the elderly as well as provide additional financial resources in case of a critical illness.…”

Equity Release Contracts with Varying Payments

“…The price of zero-coupon bonds could be treated as a discounting function from the time T to the moment t (0 ≤ t ≤ T) (Marciniuk et al, 2020). Hence…”

“…Since 2005, public awareness has also been growing in respect of this issue. Many more people have become familiar with the idea of funding the costs of old age by drawing on equity in housing (Marciniuk et al, 2020). Different varieties of these products exist in many countries (e.g., Spain, Ireland, France, Germany, Italy and Poland); however, the UK market, where such contracts were introduced in the early 1990s, is still the largest European market for equity release contracts (Shao et al, 2015).…”

Mass homeownership policy and economic well-being of the elderly: empirical evidence from the Polish household survey

“…First, as shown by Hoekstra and Dol (2021) in Eastern Europe, similarly to the Mediterranean countries (both regions share more familialistic welfare state models), the attitudes of the elderly to all equity release strategies (such as downsizing, sale, reverse mortgage) are rather reluctant, because housing is often perceived as a part of family strategy and the bequest motive is very strong. Moreover, in Poland, the equity release market is underdeveloped, and it offers a very limited scope of such financial products as reversed mortgages (Marciniuk et al, 2020). The aforementioned reasons allow one to doubt the role of homeownership (and its potential as equity release in old age) in the asset-based welfare strategy as relates to Polish households.…”