Capturing the mortgage opportunity

Axis Re’s Kavan Tucker outlines current trends in the mortgage reinsurance space.

How big is the opportunity for the private reinsurance sector for mortgage business?

Mortgage is a multi-year class, so we normally talk about expected premium over the life of a contract. The majority of global expected premium income, which is well over $1bn on an underwriting year basis, comes from single-family collateral. The majority of exposure comes from the US, where the government-sponsored enterprise (GSE) credit risk transfer (CRT) program for single-family limits issued on an annual basis ranges between $4bn-$5bn. The level of US reinsurance limits issued is generally linked to single-family mortgage originations, and this trended to record levels above $4trn in 2020 and 2021. Much of this activity was fuelled by low interest rates, stimulus programmes and elevated demand exceeding tight housing.

Outside the US, there are strong markets in Australia and continental Europe, with emerging demand for mortgage reinsurance in parts of Asia and Latin America. We see aggregate mortgage reinsurance limits trending over $2bn in these regions.

Mortgage reinsurance can be an attractive diversifier to traditional P&C lines, but the analysis, multi-year aggregation monitoring and ongoing surveillance/re-pricing requirements are best handled in an infrastructure that sits largely outside of traditional P&C processes. So careful investment and planning is needed as mortgage reinsurance is ultimately financial cat business.

“Mortgage reinsurance can be an attractive diversifier to traditional P&C lines, but the analysis, multi-year aggregation monitoring and ongoing surveillance/re-pricing requirements are best handled in an infrastructure that sits largely outside of traditional P&C processes.”

Kavan Tucker, senior underwriter, mortgage, Axis Re

How has primary mortgage insurance been impacted by Covid-19, and what have the ramifications been for reinsurers?

The initial impact on US private mortgage insurers (PMIs) was an increase in loss and reserve uncertainty paired with a reduction in available risk transfer capacity, leading to an increase in un-hedged exposure. This was a function of fear, in response to Covid-19 uncertainty and spikes in experienced delinquencies. The response of US PMIs was to hunker down, raise rates and tighten loan underwriting standards. Over time, the loss expectation – while still uncertain – diminished as the US housing market proved resilient.  

To what extent has the upward pricing pressure which has impacted much of the reinsurance world been felt within the mortgage line of business?

Mortgage reinsurance hasn’t suffered the performance volatility of other classes in recent years so direct pressure to increase prices in sympathy with other reinsurance lines was not really present. That being said, pricing did increase in 2020 and 2021 due to Covid-19 impacts. In general, mortgage reinsurance pricing flexes with capital supply, comparable capital market execution and underlying loan collateral quality.

Looking ahead to 2022, where do you see the major growth opportunities for Axis Re’s mortgage business in the near term?

Much of Axis Re’s mortgage business in the US – like most other firms participating in mortgage reinsurance – is tied to the level of mortgage originations and the degree to which the CRT program regains favour under the Federal Housing Finance Agency’s capital regime. US mortgage originations are expected to slow in 2022, potentially reducing the overall reinsurance limit purchased by the US PMIs and GSEs. A return to regular GSE new issuance flow or requirements to hedge any additional credit risk retained through Covid-19 may offset some of the projected decline in new mortgage origination volumes.

Outside the agency product, we are seeing certain banks with mortgage exposures giving greater consideration to reinsurance capital relief covers. There also seems to be a growing ex-US deal flow which presents additional opportunities. 

Ultimately, mortgage remains a highly complex and technical market. For us at Axis Re, we continue to closely analyse the space and exercise smart underwriting to successfully capitalise on the opportunities.

Is there a role for ILS to play in mortgage reinsurance? 

Yes, but it’s not easy to do as you need to marry demand with duration and optimised frictional costs. If both parties are motivated there’s potential for it to work relatively seamlessly, and it’s an area for opportunity.