Reinsurers warm to mortgage risk
Pricing in the mortgage credit risk
market has reduced significantly in
recent years, but it remains a very
profitable business for reinsurers, with more
showing an interest in moving into this
sector all the time, Joe Monaghan, executive
managing director of Aon’s Reinsurance
Solutions business, told PCI Today.
Freddie Mac and Fannie Mae, the US
government-sponsored enterprises (GSEs) that
provide liquidity to the US mortgage markets
by buying mortgages from lenders, first
transferred risks into the reinsurance sector in
2013. Between them, they now transfer some $5
billion of risk per year to around 40 reinsurers
which play in this space.
They have also indicated they would be
keen to build up the panel of reinsurers they
work with further; an executive from Freddie
Mac said in this publication yesterday that
they would like to build the panel to around
50 reinsurers, the increase helping to ensure
its credit risk transfer programme will remain
stable and sustainable in the long term.
Monaghan said this will be achievable as more
reinsurers grasp the benefits of diversification
this line of business offers, its healthy levels of
profitability—and they invest in the resources to
move into this space as a result.
PCI Today Day 3 Tuesday October 30 2018
is still giving reinsurers a return of around 14
or 15 percent, Monaghan said. “It was in the
20s but this remains a very attractive line of
business,” he said.
He added that the barriers to entry to
entering this line of business have also fallen as
the availability of analytical tools and models
to assess the risk has increased and expertise
is now growing in the industry about how to
understand and price the risks.
“New players may only be taking a 5
percent share on a treaty alongside another
25 reinsurers, many of which have extremely
sophisticated risk modelling capabilities on
“That gives players reassurance; you have
to understand the risk but you don’t have to
make huge investments to get to the point you
are comfortable,” Monaghan said.
He added that the underlying dynamics in
the US housing market are very positive, with
increases in the value of homes being driven
by a shortage of suitable properties, mainly
due to a shortage of labour—itself a hangover
of the last financial crisis—as opposed to an
abundance of liquidity in the market.
“All that is good for re/insurers taking on
the risk; the sector is stable and the underlying
dynamics positive,” he said. l
Many lines in a ‘holding pattern’ on rates for renewals
Re/insurers increasingly accept there
may be little movement on rates yet
again in the next renewals—and they
are willing to judge lines of business on their
own merits, Christopher Donelan, president and
chief underwriting officer of North American
reinsurance and head of global casualty at
Sompo International, told PCI Today.
“The market is coming to terms with where
rates are going to go for January 1,” Donelan said.
He added that the market is still dealing with
the effects of the deterioration from the 2017
catastrophe events, and waiting to see whether
this will impact on terms and conditions.
But, he added, many parts of the market
are in a holding pattern at present, with not
enough pressure to make them either harden
The market is still coming to grips with the
amount of supply and demand, he said, and
assessing if this will change at the beginning
of 2019. According to Donelan, if there is the
same amount of capacity as last year there
could be downward pressure on rates.
On the liability side, he said, supply
and demand will determine if any rate
movements occur in different lines, as will
any specific concerns underwriters have.
The skills of the individual underwriters
will be important, he said.
While there is pressure on rates, re/insurers
are becoming more efficient in other ways.
Donelan noted that technology was making
the industry more efficient, something that is
better for the market as a whole.
“A lot of it isn’t tested yet, but anything
that tries to make us more efficient is probably
going to be good for everyone.”
He added that it will be interesting to see what
the final impact of technology will be on the
industry. “Jumping in to new technology, you can
make a lot more profit, but you’re also taking on
a whole lot more risk,” he pointed out. l
He said pricing has fallen due to a
combination of increased competition between
reinsurers, spreads falling on the equivalent
risk transfer programme that moves the same
risks into the capital markets via bonds, and
the fact that the underlying portfolios have
consistently performed so well.
“It has never come close to a loss; some
portfolios have never even had a single
mortgage default,” he said.
Even with pricing having fallen, the business