A trend in equity release schemes could lead to £50bn exposure

A new long-tail liability threat has appeared for financial institution risk underwriters and their reinsurers.

Banks have begun selling equity release schemes, which actuaries have predicted could lead to a £50bn exposure over five years.

Actuarial consultant for Tillinghast, Chris Waites, warned: "Nobody has yet developed an insurance product that takes in this combined risk and insurers are unsure of how to go about it.

"People are living longer, which means longevity is a long term risk, between 25 and 40 years. It could mean that insurers may not have enough credit if they needed to pay out in the future."

Equity release schemes became popular in the 1980s during the first major housing boom. It is a way for homeowners to unlock some or all of the equity they have on their home without selling it. While there was no protection for the borrower in the 1980s, current products have no negative equity guarantees attached.

This means that losses would be pinned on the lender, such as bank or building society, which in turn will want to recover that loss from insurers.

Huge losses could arise during a house price crash, where the loan size would end up being higher than the value of the property when the time comes to repay the loan.

Actuaries have warned that while reinsurers factor in the risk of house prices collapsing, they were not taking into account the longevity of the risk.

Partner at actuary Lane Clark & Peacock Joe Monk said: "Equity release can be a huge liability and it would be in their (banks and building societies) interest to get rid of this. The solution for the insurer is to set the proper pricing in the market, which means that premiums will have to reflect this risk.

"This market could be worth £50bn over the coming five years."

A spokesman for Swiss Re said the company was reviewing the situation at the moment and is in talks about introducing a policy specifically for equity release.

Mark Kelly, director of personal finance for Norwich Union said: "We do reinsure for equity release. It is a huge risk but the market only requires a moderate rate of house price inflation for it not to be."

Equity release schemes are currently not regulated by the FSA. The product has received a bad reputation since the 1980s, when rates rocketed. The cost of the loan outstripped the income received from bond investments.