OLDWICK, N.J.--(BUSINESS WIRE)--The amount of mortgage exposure ceded to the global reinsurance industry continues to grow as more reinsurers partake in the currently lucrative business of covering mortgage risk. How the operating environment continues to be favorable for the U.S. mortgage industry and conducive to reinsurers taking on more mortgage risk is detailed in the new A.M. Best report, “Global Reinsurance: Optimism Fizzles, It’s Back to the ‘New Normal.’”
According to the report, reinsurers’ sustained appetite to provide coverage for mortgage risks is being driven mainly by the benign mortgage loss environment, the increased capital requirements for private mortgage insurers (as outlined in the Private Mortgage Insurance Eligibility Requirements) and the favorable home pricing conditions. Another key factor is the mandate by the Federal Housing Finance Agency requiring the two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, to “de-risk” their balance sheets and reduce taxpayers’ risk by increasing the role of private capital in the mortgage market. As a result, supply and demand conditions have created a favorable outcome, with reinsurers being the beneficiaries of the insurance-reinsurance transactions of the GSEs’ U.S. mortgage credit risk-transfer programs. As of July 31, 2018, Freddie Mac and Fannie Mae have transferred a combined $18.2 billion in limits to the reinsurance sector, and A.M. Best expects reinsurers’ participation in the credit risk-sharing programs to remain elevated over the next few years.
The report also outlines the recent ramp-up of mortgage risk ceded by private mortgage insurers to third-party reinsures – averaging 13.2% of gross premiums written from 2016 to 2017, compared with 5.1% from 2012 to 2015 – and the emergence of mortgage insurance-linked securities (MILS) transactions for covering mortgage exposures. These MILS transactions effectively transfer mortgage exposures to the capital markets in a fully collateralized format, and as of August 2018, approximately $2.89 billion in mortgage insurance limits has been transferred to investors.
Finally, the report section, titled “Reinsurance and the Speedy Road to U.S. Mortgage Risk,” outlines the continuum of “diversification benefits” achieved by the various types of reinsurers that cover mortgage risk ceded either by the private mortgage insurers or by the GSEs through their risk-transfer programs. This diversification benefit is a function of the marginal increase in Net Required Capital and depends entirely on the type of reinsurer taking such risks.
“Diversification benefit is highest for well-diversified reinsurers with low-risk investment portfolios, markedly less for moderately diversified reinsurers with high-risk investment portfolios, and virtually non-existent for reinsurers that solely cover mortgage risk,” said Emmanuel Modu, managing director, Insurance-Linked Securities.
A.M. Best’s criteria procedure for mortgage risk, “Evaluating Mortgage Insurance,” is available in the methodology section of A.M. Best’s website.
To access a copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=277679.
A.M. Best also will host its annual Reinsurance Market Briefing at the 2018 Rendez-Vous de Septembre (Rendez-Vous) on Sunday, Sept. 9, 2018, at the Hermitage Hotel in Monte Carlo, Monaco. The briefing will start at 10:15 a.m. and conclude at 11:45 a.m. (CEST). To register online, please click the following link: www.ambest.com/conferences/rmbseptembre2018.
A.M. Best is a global rating agency and information provider with a unique focus on the insurance industry. Visit www.ambest.com for more information.
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