Profitability and risk profile of reverse mortgages: A cross-system and cross-plan comparison

This paper provides a complete framework to analyze the profitability and risk profile of reverse mortgage products, particularly the stochastic dominance criteria. This study argues that the modern solvency capital requirement such as Solvency II may depress the loan-to-value ratio and the intervention of government may be necessary. We also demonstrate that the lender prefers the lump-sum products and this may explain why the lump-sum products dominate the market in practice. Our work can help financial institutions and governments understand the properties of reverse mortgages, and provides a necessary incentive for these organizations to develop a reverse mortgage market.