Pricing Method Of Reverse Mortgage Based On The Incentive Compatibility

With the aging continuously accelerating, the problem of pension has been one of the major social problems. How to resolve the social crisis and financial crisis which are brought by aging has become the focus of academics and practitioners. In numerous studies, reverse mortgage, based on the thought of cash flow conversion, converted the realizable value of future to current cash flow, thus can provide protection for the daily life of the elder. In this view, reverse mortgage has become a new way to get pension. Reverse mortgage is widely practiced in foreign countries, but there is no successful precedent in China. Traditional concepts such as’raise children for old’, inheritance, and different demographic environment, land system, housing property rights, education level have obstructed the issue of reverse mortgage. In foreign countries, the implementation of reverse mortgage is built on a accurate pricing. Although there are many references of reverse mortgage pricing in China, the feasibility has not been verified. Based on previous research, combined with China’s national conditions, this paper propose a new way to reverse mortgage, in order to provide a meaningful thought to reverse mortgage.On the basis of reading a lot of existing literature, this article explains the meaning of reverse mortgage, the relevant theoretical basis in-depth. We summarized the existing research of domestic and foreign countries of reverse mortgage, including summary review both in China and abroad. Also, the pricing model of reverse mortgage has been considered in this article. Based on the thought of incentive compatibility, we proposed a new pricing model. In this model, insurance is considered. This article fully considers the risks that faced by mortgagers and borrowers. Respectively, we calculate the quantity of money in different modes of one-time payment and annuity payment. In theoretical models, we discuss the boundary the incentive compatibility. Then we estimate the mortality of Chinese who are above 65. And using the Monte Carlo simulation and sensitivity analysis to test and verify the effects of this model, solving reverse mortgage loan amount of different ages of borrowers under the incentive compatible state. The conclusions of this article can provide supports and theoretical references for relevant departments.