Reinsurers face growing losses from mortgage exposure: AM Best
Reinsurers face increased losses from exposure to government sponsored entities (GSEs) and private mortgage insurers, which will see soaring mortgage delinquencies as a result of the COVID-19 pandemic, according to AM Best.
In a report titled Mortgage Reinsurance and the COVID-19 Pandemic, AM Best noted that reinsurers have been taking on incrementally more risk from GSEs, allowing them to de-risk their balance sheets by shedding mortgage credit risk through their credit risk transfer programmes. From 2013 through 2019, the GSEs transferred approximately $24.5 billion of exposure limit to the traditional reinsurance market, it said.
Reinsurance also allowed private mortgage insurers to implement their “originate, manage, and distribute” business model, AM Best said, facilitating their compliance with the private mortgage insurers eligibility requirements (PMIERs) imposed by the GSEs. From 2016 through 2019, private mortgage insurers have ceded about 13.4 percent of their gross written premium to the traditional reinsurance market, it said.
However, “since the start of the outbreak, jobless claims have skyrocketed, resulting in the highest unemployment rate since the Great Depression,” AM Best noted. Although the CARES Act and loan forbearance, deferral and modification programmes have been designed to moderate the impact of the COVID-19 pandemic on borrowers, they will not be able to fully mitigate the impact of the crisis, the rating agency said.
The rate with which loans move from delinquency to claims remains unclear, AM Best noted, due to the unprecedented nature of the pandemic. However, it said it is inevitable that higher losses are in the cards.
Factors that affect the primary mortgage market also influence the broad secondary markets, such as mortgage-backed securities and mortgage reinsurance, AM Best warned.
AM Best revised its market segment outlook for the private mortgage insurance segment to negative in April 2020, owing to the expected increase in losses on mortgages.
