US mortgage reinsurance demand set a new record in 2022 with the government-sponsored enterprises (GSEs) Fannie Mae & Freddie Mac, as well as the six US mortgage insurers (US MIs) purchasing more than $18 billion of total reinsurance limit.
In Aon’s mid-year Reinsurance Market Dynamics report, analysts highlighted that in 2023, although it is seeing improvements, there are still a number of challenges in the capital markets execution that competes with reinsurance.
At the same time, a number of reinsurers are constrained in their ability to take on mortgage risk due to slower de-risking of existing reinsurance transactions.
Analysts noted that both the GSEs and the US MIs are entities that benefit from transferring risk from their monoline balance sheets to diversified reinsurance counterparties. They both achieve portfolio risk reduction as well as capital relief if supported by qualifying reinsurance structures, as well as continuing to seek ways to share risk with diversified balance sheets.
In addition to the record capacity deployed to support US mortgage reinsurance buyers over three consecutive years, analysts stated there are two macroeconomic factors affecting reinsurer capacity.
Firstly, mortgage interest rates have risen significantly throughout the past 12 months. Whilst a majority of existing borrowers in reinsurance deals have much lower interest rates than what is currently available, analysts noted that they are less likely to prepay their mortgages, which would trigger them coming off risk and out of existing reinsurance deals.
Elsewhere, when borrower’s home equity increases through house price appreciation, the reinsurers’ modeled risk is reduced. Throughout the past year, home prices have been flat to slightly down on a nationwide average basis.
Analysts also addressed how the GSEs and US MIs continue to have “strong demand for reinsurance.”
“Although the amount of reinsurance purchased in 2023 will be significantly lower than in 2022, it will be consistent with pre-COVID levels, expected from $6 billion to $9 billion.
“Given that individual buyers maintain counterparty risk frameworks that govern their exposure to individual balance sheets, and that some reinsurers have limited remaining internal capacity, there is an opportunity for new reinsurance capital to support the U.S. mortgage reinsurance line of business.”
