In response to reinsurers expanding appetite for mortgage insurance risks, rating agency A.M. Best has published a new criteria procedure, “Evaluating Mortgage Insurance,” which it says is effective immediately.
Following a request for comments process, where the industry was asked for its feedback on the new criteria procedure for mortgage insurance risks, A.M. Best has now finalised its approach to two items, 1) rating mortgage insurers and 2) assessing the risk charge associated with insurance-based credit risk transfer initiatives by the two government-sponsored enterprises (GSEs), Freddie Mac and Fannie Mae.
The second of those will impact the reinsurance firms that have been participating in mortgage risk transfers and securitisations, which has been an increasing focus for a number of reinsurers that have been looking for new diversification opportunities.
A.M. Best said that its criteria procedure for mortgage risk will give insight into the information requirements, key rating considerations, risk modeling and surveillance activities that the agency would apply when rating mortgage insurers within the Best’s Credit Rating Methodology framework.
The criteria procedure also outlines the process by which A.M. Best will evaluate the risk associated with the risk transfer programs that see a portion of the credit risk associated with a reference pool of mortgage loans from GSEs Fannie and Freddie transferred to the /re/insurance market within the framework of A.M. Best’s capital model, Best’s Capital Adequacy Ratio (BCAR).
A.M. Best said that the publication of this new mortgage insurance rating criteria procedure is not expected to result in any changes to outstanding ratings.
It will ensure that reinsurers taking on mortgage risks are correctly capitalised to do so, and face the appropriate risk charges, which could result in a decrease in, or capping of, risk appetite for mortgage exposure for some firms.
