EQUITY RELEASE has emerged in the past year as one of the fastest-growing sectors in banking. Given the term of mortgages involved, it should be looking to be in the vanguard of understanding and management of environmental-related risks.

In the same year as the new Taskforce on Nature-related Financial Disclosures calls for organisations worldwide to report and act on evolving nature-related risks, one UK institution with a significant exposure to the Lifetime Mortgage market is already working with MIAC Analytics to do just that.

The new software system, which is now up and running live in the UK market, was primarily developed to bring vastly improved efficiency and accuracy to the management of loan books – but it is the future potential for predictive and climate-related modelling that is drawing attention.

Dr Darrel Welch, Managing Director, Modelling & Analytics, explains:

“We have already run analytics to prove the effects of flood risk on house prices, and the direct effects this is having on mortgage books. We are preparing graphic illustrations to share publicly in the coming weeks.”

By overlaying scenarios such as flood/subsidence risk, construction type and other environmental impacts on the sustainable value of the underlying property asset, lenders can get a much clearer picture of their complex books.

This technology, built into the already popular Vision™ platform from MIAC Analytics, has already proven to significantly improve insight and understanding of risk, far more efficiently than the pre-existing models that relied upon multiple spreadsheets. Welch continues:

“The potential longer terms and complexities at play in the LTM sector make it even more challenging to run simulations, modelling and stress testing or analyse the long list of scenarios needed for pricing or regulatory approvals.

“Every asset class requires auditable and scalable processes for this, but when you start to simulate the seemingly infinite permutations of potential future factors on top – such as mortality, drawdown, prepayment and dilapidation – the spreadsheet models make it time consuming to calculate cash flow projections or the No Negative Equity Guarantee and are more susceptible to human error.”

Ongoing development within Vision is looking to future-proof its use for clients with other critical factors incorporated. As well as the environmental factors – which over the course of a lifetime mortgage portfolio will only increase in significance – it also includes the ability to analyse, and in the near future also to predict, distributions of house prices and movements in the property market that fall outside the normality assumption.

Darrel Welch concludes: “Not only does MIAC Vision give lenders the necessary details and insights to meet current and future regulatory and business objectives, but it allows this to be done far more quickly and efficiently, and at a larger scale.”

Article on www.ffnews.com

Banks Can No Longer Ignore Environmental Risks, Data Experts Show