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We provide a practical superhedging strategy for the pricing and hedging ofthe No-Negative-Equity-Guarantee (NNEG) found in Equity-Release Mortgages(ERMs), or reverse mortgages, using a discrete-time model. In contrast to manypapers on the NNEG and industry practice we work in an incomplete marketsetting so that deaths and property prices are not independent under mostpricing measures. We give theoretical results and numerical illustrations toshow that the assumption of market completeness leads to a considerableundervaluation of the NNEG. By introducing an Excess-of-Loss reinsurance asset,we show that it is possible to reduce the cost of the superhedge for aportfolio of ERMs with the average cost decreasing rapidly as the number oflives in the portfolio increases. All the hedging assets, with the exception ofcash, have a term of one year making the availability of a property hedgingasset from over-the-counter derivative providers more realistic. We outline howa practical multi-period ERM pricing and hedging model can be built. Althoughthe prices identified by this model will be higher than prices under thecompleteness assumption, they are considerably lower than those under theEquivalent Value Test mandated by the UK's Prudential Regulatory Authority.

Pricing and Hedging the No-Negative-Equity Guarantee in Equity-Release Mortgages