Actuarial Control Cycle: Creating a non-actuarial solution (part 2 of 2)

In the first article, I explained the problem that some individuals face in Malta in obtaining a mortgage. Since obtaining a life insurance cover is a requirement for a mortgage, individuals who might not be quoted by local insurers due to a very low risk appetite are essentially barred from buying a house.

We had defined our cohort of interest as first time potential home-owners (up to €250,000 loan amount) who have a high likelihood of reaching the age of 65 but are still unable to find (affordable) life insurance cover.

The thing is, we hadn't yet been close to providing a solution. We quickly realised that the insurance market had no appetite to consider solutions for this particular cohort (with IFRS 17 on their mind and restrictions from reinsurers) and that other teams may have been working on other similar things. In particular, the Commission for the Rights of Persons with Disability (CRPD) had been looking at developing a solution for the lack of insurance cover over many lines of business. We also learned of how many other different problems were solved such as lack of financing for investments.

EUREKA!

Essentially we had defined the cohort of interest well but then there was a realisation - we needed to fix a legal problem not an insurance one. My first suggestion was a mortgage backed security. This would entail floating a mixture of loans on the market where the legal risk (of access to property post death) is transferred to the financial market. This seemed to scare any economist due to its negative connotations to the 2007 housing crisis in the US (and worldwide).

We learned of another scheme in which the Malta Development Bank was acting as a guarantor for future studies or for buying equipment (two separate schemes). In the latter, for every €1 guaranteed by the MDB, a €5 loan in equipment could be financed (more about this here: BOV SME Invest Scheme).

Therefore there could be a potential for such a guarantee - a mortgage is based on an asset that is less likely to go down in value than equipment, the borrower is less likely to default but is on a longer time period.

There came the second option - a fund which acts as a guarantor. I thought even a 1:10 ratio is far more advantageous for a bank than 1:5 on equipment.

Easy Peasy ... not

Recently I corrected an assignment in which the student stated that actuaries control time and probability. Sadly none of us work at the Time Variance Authority. This solution required expertise from all ends (legal, operational, finance, negotiation) and continuous discussions with banks and stakeholders.

Designing a solution is not simply just getting that Eureka moment and that's it, it requires months of work. It also required special expertise.

We needed the expertise of the Housing Authority (again Stefan Cutajar, Matthew Zerafa and Chris Spiteri) but also someone from an operational and financial background. We found these in Conrad V. Busuttil and Karl Tonna. This formed part of a core group to set up the project.

The solution designed had to focus many aspects but we split it into four main stages: onboarding the client, run-of-the-mill, the client exiting the scheme and finally in case of death. Onboarding the client meant vetting whether the client is suitable for the scheme and their pricing without adding too many costs. The run-of-the-mill work included how premium is collected and how funds are invested. Client exiting the scheme was an easy process while death included the different options, always at the client's needs (or rather their heirs). In the case of death, it would be expected that the heirs would want to pay off the loan but if they do not want to, or they cannot - the scheme acts as an equity partner. Thankfully the Malta Housing Authority already had a scheme of equity partnership for individuals above the age of 40 who were not able to afford a full loan so we could adapt parts of that scheme. Throughout all stages, we needed to keep administration to a minimum to limit costs (and hence cover more individuals) while keeping efficiency and limiting chances of fraud.

Monitoring Results and Actuarial Professionalism

Endless communication was recorded - mostly as our role seemed to be to set up the structure and operations of the scheme rather than its continuous operation. It is not the aim of this article to list down how each decision was arrived as it would be too long.

As the scheme is now at the start of operation, it would be vital to monitor its processes at continuously. This was my first venture in a project of public help and you get that fuzzy feeling of - hey I helped someone (by creating a sustainable solution)!

Yet is surely doesn't stop there. The scheme is not as simple as it sounds, it is not a copy and paste of a guarantee for other cases. It is not an insurance product either - I followed Frank Redington's mantra:

"An actuary who is only an actuary is not an actuary"

Given the complexity and originality of the scheme, it is vital for it to be monitored and updated continuously. Any public information passed by third parties should be monitored - I already saw three giving misinformation (and I was a bit of an arse to contact one of them since I know them). It was designed to be sustainable and fair not a charity. Conditions that are covered will improve with better medication and better insurance underwriting in Malta. That is some individuals in the scheme may be able to purchase affordable life insurance at a later stage.

You can read more about the New Hope Scheme here. Individuals can also speak to APS Bank which is the first bank to welcome this scheme.