Like many developed economies, the UK’s later life lending market – mostly equity release mortgages – is sitting on a significant structural disconnect. While over-55s hold an estimated £3.7trn in property wealth, the equity release market remains small by comparison. Last year, total lending reached just £2.57bn according to industry group the Equity Release Council (ERC). While that represents an 11% increase from 2024, it accounts for a mere 0.07% of the total housing wealth held by older cohorts.
Insurers are favouring funded re as it helps firms manage the market and longevity risks associated with writing bulk purchase annuity (BPA) business by reducing capital charges and therefore making PRT deals more competitive.
Unsurprisingly, given its growth and potential for capital optimisation, UK regulators have been carefully watching the increased use of funded re. In June 2023, the Prudential Regulatory Authority (PRA) sent a “Dear CRO’ letter to heads of risk at UK life insurers.
The letter outlined the regulator’s two main concerns from a sectoral review which it had carried out.
“One of the key risks arising in funded re is that firms recapture sub-optimal portfolios with depressed values and with limited ability to be transformed effectively to the firms’ preferred portfolio,” the PRA letter said.
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