MONDAY
16.10.17
More drawn to mortgage reinsurance by growth, innovation, returns
DAY 2
More players are drawn to
mortgage reinsurance by its
growth, innovation, returns
The mortgage reinsurance markets have
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21-continued 23 Elmfield to develop and mature to the
extent this product now represents a mainstream
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line of business for the growing number of
Email:reinsurers operating info@in the space, Joe Monaghan,
leader of Aon Benfield’s US credit &newtonmedia. guaranty,
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and government practice, told PCI Today.
www.“In the past 12 months five more reinsurers
have started newtonmedia.writing this type of business, meaning
co.uk
around 42 re/insurers are now operating in this
space,” Monaghan said.
YOUR “While it’s a very stable market, there are
areas where innovation CONTACTS is occurring and the
IN CHICAGO
potential for growth is great, especially if market
share can be taken from the bond markets, which
also take on this risk.”
Wyn In the soft Jenkins market of recent years, characterised
MANAGING EDITOR
by stagnating growth for insurers and reinsurers,
much-needed growth and diversification for
Telephone:mortgage reinsurance, which doors only in the past four years +has opened its
those willing to take the plunge.
to re/44 insurers,7715
The US 770 mortgage credit 468
business has a very
has become a lucrative new market providing
different risk profile (Continued top of page 2)
Email:Casualty wjenkins@remains tough newtonmedia.but pockets co.uk
of opportunity will emerge
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News
(Continued from top of page 1) present a
compelling proposition for re/insurers, according
to Monaghan. Mortgage reinsurance business is
principally generated in the US by Fannie Mae and
Freddie Mac, the two US government-sponsored
enterprises that provide liquidity to the US mortgage
markets by buying mortgages from lenders.
Since the 2008 financial crash and over the
last four years in particular, they have been
encouraged by government to transfer more risk
into the private sector. They do this in two ways:
around 75 percent of risks are transferred into
the bond markets and about 25 percent into the
re/insurance sector.
Monaghan said there is a pipeline of new
entrants preparing to enter the market.
“All deals are oversubscribed and rates are
down, but they still present an attractive return
profile for reinsurers,” he said.
He estimated that some $70 billion of risk
exposure has been transferred into the private
sector so far—roughly 20 percent of that into the
re/insurance sector.
Innovation is taking place: Freddie Mac has
tweaked its reinsurance structure in the last 12
months, which means the amount it is buying is
slightly down on previous years, and Fannie and
Freddie Mac have both succeeded in buying a
new form of coverage.
“Traditionally, a block of business has
been originated and the coverage kicks in
around six or nine months later. This new
coverage puts protection in place for mortgages
Casualty remains tough but pockets of opportunity will emerge
(Continued from bottom of page 1) Stevens said.
She believes the high losses from the recent
hurricanes will have a knock-on effect on casualty
lines and rate decreases should at least slow in the
aftermath of the losses.
“With the exception of commercial auto, all
property-casualty lines have been declining for the
past seven years,” she said. “Following the storms,
the industry is seeking rate increases, certainly on
the property side. It is difficult to predict what will
happen but we think the rate of decline will slow
at least for general liability and umbrella policies.”
The other influencing factor on liability rates
will be the strength of reserves.
originated, within preset criteria, in advance.
Policymakers like this because it removes that
window of around six months when protection
is not in place,” Monaghan said.
“These are forward contracts: coverage is
in place from the moment the mortgages are
acquired by Fannie or Freddie. We also expect
to see reinsurance opportunities from mortgage
insurance (MI) companies, which represents
further innovation for this market.”
Although there will be no ceded losses to
mortgage reinsurers from the recent hurricanes,
he believes the wider response of reinsurers to
the losses will help reassure policymakers in
terms of the financial robustness of reinsurers
and their willingness to pay claims.
“These losses will also illustrate that this line
of business is truly uncorrelated from the other
parts of re/insurers’ portfolios. This market has
shown itself able to deliver returns in the highteens—
and that is through the entire cycle,
including 2007 and 2008 when the market would
have borne losses,” he said.
While MI companies will deliver some
growth, Monaghan said a potentially larger
opportunity will come if reinsurers can take a
share from the bond markets.
“The bond markets are fully collateralised and
spreads have come in, but even if reinsurers were
to achieve modest market share growth from
25 to 30 percent that would represent significant
growth of reinsurance limit placed year on year,”
he explained. n
“Publicly available data suggest these are not as
strong as they were a few years ago; reserve releases
have slowed and that could be a key signal that the
industry will be unable to sustain further decreases.
But it is very difficult to predict,” Stevens said.
Stevens does see some areas of opportunity:
structural changes in the economy will unveil
new requirements for risk transfer. Cyber risk and
supply chain risk are examples of this, and more
areas will emerge.
“The landscape is changing and a protection
gap will emerge as society embraces new
technologies,” she said, giving the advent of
autonomous vehicles as one example of this. n
2 | PCI TODAY | DAY 2: Monday October 16 2017
Jennifer Stevens
PCI TODAY Monday October 16, 2017
Joseph Monaghan
The casualty market in the US remains
competitive for reinsurers, with rates still
very soft in several lines of business and loss
trends increasing. But there remain pockets of
opportunity and rate decreases will likely slow in
the aftermath of the recent hurricane losses.
That is the view of Jennifer Stevens, senior
vice president, casualty, Swiss Re, who told PCI
Today that while it remains a tough market for
the reinsurer to navigate, she remains optimistic
that change is on the horizon.
“It is no secret that we have been in a soft market
for some 10 years now—it is an environment we
are all trying to handle,” she said.
“It has not been helped by the prolonged low
interest environment that has also made investment
returns hard to come by. On top of that we are
seeing increases in loss trends in some areas.”
Stevens said this phenomenon first emerged
in the auto business. Carriers that have this as
a significant part of their portfolios have been
trying to understand the driving forces behind
this so they can react.
“We have seen increases in the frequency
and severity of claims and we are trying to
understand that. The concern is that this also
starts to occur in other areas of liability business,”
she explained.
“We are monitoring that carefully so we can
stay on top of pricing. It is in everyone’s interests
to have a healthy and sustainable market.”
A trend highlighted recently is inflation
in medical expenses claims. The medical
expenditure growth rate was 2 percent in 2013,
but went up to 6 percent in 2015/2016 and is
expected to stay at that level. Overall, medical
expenditures are rising compared to prior years.
This is a possible signal of rising medical inflation
which drives bodily injury claims costs upward.
“We are watching that area carefully,” she said.
Another challenge is the growing propensity
of individuals to (Continued bottom of page 2)
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DAY 2: Monday October 24 2016 | PCI TODAY | 1
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Lack of new equity cash
and trapped capital could
mean bigger rate rises
Rates in property-catastrophe reinsurance are
likely to increase more than many believe in
the aftermath of big hurricane losses because of
the low level of equity raising and the emergence
of trapped capital as a major issue.
That is the view of Michael Millette, managing
partner of HSCM Bermuda (Hudson Structured
Capital Management), the ILS, reinsurance and
transportation finance investment manager set up by
the former structured finance head of Goldman Sachs.
Millette told PCI Today that the money entering
the industry has been low in comparison to previous
big losses. In the aftermath of Hurricane Katrina in
2005, which caused $82 billion in insured losses, for
example, some $30 billion of new money entered
the industry through a mixture of new companies
and existing entities. In the aftermath of 9/11 in
2001, a similar amount entered.
While new money is entering the industry
through funds, sidecars and other forms of
risk transfer vehicles, Millette stressed that it is
nowhere near the amount needed to dampen
price hikes on certain lines of business hit by big
losses. (Continued top of page 4)