Risk Mapping in Reverse Mortgage Portfolios

In the context of an ageing populaon where the issues of insucient income of rerees are growing, the financial instrument of the Reverse Mortgage (RM) enters among the possible soluons. The RM contract, except for the UK, the US, and Australia, is not yet a widespread instrument, especially in countries where the psychological componentof inheritance has an important game-power, such as the Italian one. On the other hand, the unwillingness for its issuing by financial agents, i.e. banks or insurance companies, lies in its underlying risks: the house price risk, the financial risk and the longevity risk. In this work we address the lender’s challenges in managing these risks. Our aim is to provide the lender the weight of each source of risk within the RM contract, allowing him to idenfy the most relevant one and thus manage it in the best possible way. To achieve our goal, we consider a porolio of reverse mortgages provided to homogeneous Italian borrowers and assess the impact of each risk factor by applying a one-component Value-at-Risk procedure on an appropriate loss funticon evaluated year-by-year and that summarizes the lender’s annual inflows and outflows. This procedure exploits Monte Carlo simulaons applied to fitted stochastic processes on Italian data to obtain the distribution of each risk component and, thus, all its quantiles. Our calculations showed that longevity risk and nancial risk contribute to uncertainty, but not in such a remarkable way and that the lender can partially control the financial risk through the analysis of the risk premium values. The main result is that house price risk is the most signicant risk factor of a Reverse Mortgage portfolio.