Rating agency AM Best has reviewed the mortgage risk transfer programs employed by government-sponsored enterprises (GSE), and outlined new criteria to gauge how such transactions affect the net required capital of participating reinsurers.
GSEs such as Freddie Mac, Fannie Mae, and the Federal Housing Finance Agency (FHFA) have been transferring mortgage credit risk to the reinsurance market since 2013 using credit risk transfer (CRT) programs.
For Freddie Mac, this is through the Agency Credit Insurance Structure (ACIS), while for Fannie Mae it is through Credit Insurance Risk Transfer (CIRT).
As of June 2019, the GSEs had transferred approximately $22.2 billion of initial limits to the private market through excess of loss reinsurance agreements, significantly de-risking their balance sheets.
Each ACIS transaction transfers multiple layers of risk, while each CIRT transaction transfers only one layer of risk
As more of Fannie Mae and Freddie Mac’s mortgage risks continue to make their way to the reinsurance market, AM Best has opted to publish data showing the net capital charges associated with these transactions and their affect on reinsurers’ net required capital (NRC).
AM Best’s determination of a reinsurer’s net capital charge is based on unexpected losses and premiums associated with the GSEs’ CRT programs, and takes into account each reinsurer’s portfolio of ACIS/CIRT transactions.
The impact of the total net capital charge on a reinsurer due to its portfolio of GSE CRT transactions was found to vary depending on the diversification of the reinsurer’s business lines as well as the magnitude of its investment risk.
For example, incorporating additional GSE CRT exposure increased the NRC of reinsurers that only cover mortgage risk by almost 3.5 times more than for large reinsurers with well-diversified business lines.
AM Best plans to publish the net capital charge details semi-annually, using the most current performance data available from the GSEs’ websites.