First is the introduction of a ‘qualified mortgage’ standard in the
underwriting process which has led to a contraction in the credit
box leading to a very high standard of underwriting via this strict
lending criteria.
Second, Freddie Mac and Fannie Mae have made all their mortgage
data publicly available. This performance data goes back years, over
several cycles, meaning that reinsurers can model specific mortgage
types and portfolios for a range of economic scenarios making
mortgage reinsurance a data-rich class of business
Third, these GSEs started CRTs which now have up to 50 reinsurances
participating across multiple transactions. The GSEs have a group of
underwriters who conduct detailed analysis on the underlying mortgage
portfolios and are, in effect, another set of eyes watching the credit mix.
Does this market offer strong growth potential for
reinsurers?
Unquestionably. The expansion of mortgage reinsurance since 2013
has delivered attractive margins and low loss ratios so it remains one
of the few classes demonstrating growth for reinsurers. We see this
trend continuing as mortgage risk is set to grow, and the underlying
economic metrics from the US, the world’s largest mortgage insurance
market, remain strong.
This will help underpin the growth for potential reinsurers. There
are very few other lines of business in the reinsurance world which
offer these combined attributes.
Recent innovations within the mortgage insurance world, such
as Arch’s MRT transactions, are only increasing the need for more
capacity from diverse reinsurers.
Is specific expertise to write this business needed?
We have an ‘identify, educate and recruit’ philosophy for new capacity
which is a tried and tested roadmap for reinsurers interested in
this class of business. Our experience is that a market doesn’t need
any prior experience within the area, rather a willingness to
understand the fundamentals.
This is where Arch’s experience as the world’s largest mortgage
insurer is invaluable for market education as we can help markets
understand the underlying data, the story it tells, and how differing
scenarios would play out.
17
November 2019
Bermuda:Re/insurance+ILS
MORTGAGE INDEMNITY REINSURANCE
“We can help markets understand
the underlying data, the story it
tells, and how differing scenarios
would play out.” Steven Rance
How can Bermuda benefit from this market?
Bermuda is a well-positioned geographically, agile and adaptable market
which means it can respond to changing dynamics in the reinsurance
market. Mortgage indemnity is one of the few classes that’s growing
and as reinsurers look to diversify their portfolios, they can take
advantage of the growth opportunities offered by the structure of the
Bermudian market.
Bermuda is at the centre of reinsurance excellence and home to
Arch Capital Group, which this year completed the largest mortgage
insurance-linked securities (ILS) transaction to date. Mortgage risk
reportedly now makes up 18.9 percent of all ILS risk capital.
What do you foresee for the medium and long-term
future of this market?
In the US, the future of the market is the MRT programme. Not
only is it an excellent example of utilising the emerging interest from
reinsurers in a sector and adapting it to meet stakeholder demands,
but it fundamentally helps to de-risk the US housing finance system.
We see the programme growing in the future—the market is around
$260 billion and MRT currently covers a fraction of it.
Looking at the US, the current supply and demand dynamic will
continue to shape the market. The persistent supply shortage in
the US housing market continues to underpin the steady growth
in house prices seen over the last few years. What this persistent
housing supply shortage means is that the risk of a national house
price decline is extremely limited, as the shortage should help cushion
home price declines.
Furthermore, demographic changes in the US population will
increase the demand side of the real estate market dynamic. The
increasing rates of home ownership by millennials is also expected
to accelerate the demand for housing as this generation reaches
prime home-buying age. All of this leads to the conclusion that this
lack of supply and increasing demand will continue to underpin the
housing market.
There are also opportunities outside the US and Bermuda markets,
namely in Asia where we are working with a number of insurers,
lenders and government bodies who are interested in the role that
reinsurance could play in extending lending and developing home
ownership and home building. ��
SHUTTERSTOCK / CARSTEN REISINGER