Reinsurers are increasingly looking for respite from the gloom of softening property and casualty reinsurance markets and the U.S. mortgage reinsurance market is seen as one of the brighter spots.
Rating agency Standard & Poor’s said that as the mortgage credit cycle is holding strong and this area of reinsurance has exhibited relatively stable pricing so far, reinsurers are finding conditions preferable in mortgage risks and so are being pushed to deploy more capacity there.
The “deteriorating business conditions” in much of the rest of the property casualty reinsurance market, particularly property catastrophe risks, means many reinsurers have been pushed to look for new growth avenues to support their earnings.
S&P cites “fairly healthy returns in the mortgage reinsurance business” which have attracted a growing number of reinsurers looking to take advantage of margins that have remained attractive, helped by favorable macroeconomic conditions.
Demand for mortgage reinsurance solutions remains high and there is a growing supply side of risk capital as well.
As the supply side grows though, there is expected to be more pressure on pricing of mortgage risk arrangements and renewals.
Government-sponsored entities (GSEs; Fannie Mae and Freddie Mac), continue to be the main source of demand for mortgage reinsurance and their credit risk transfer deals are increasingly attracting reinsurers in search of return driving opportunities.
“As this market matures and in view of additional supply, risk-adjusted pricing is feeling some pressure in 2017, which we expect will continue,” commented S&P Global Ratings credit analyst Hardeep Manku.
For re/insurers joining late to the mortgage risk underwriting game, however, generating similar margins is expected to be a difficult proposition, S&P says, but nevertheless the mortgage reinsurance market continues to offer an opportunity to boost returns from an overall company portfolio.
But given the attention that this market is receiving there is a good chance of prices starting to soften and perhaps terms expanding, which S&P says means that re/insurers’ risk management frameworks will be increasingly under their watchful eye.