US mortgage reinsurance demand set a new record in 2022 with government-sponsored enterprises (GSEs) Fannie Mae & Freddie Mac, as well as six US mortgage insurers (US MIs) purchasing more than $18 billion in total reinsurance. limit.
In Aon’s mid-year Reinsurance Market Dynamics report, analysts highlighted that in 2023, although improvements have been seen, there will be significant challenges in implementing capital markets that compete with reinsurance.
At the same time, many reinsurers have been constrained in their ability to take credit risk due to slow de-risking of existing reinsurance transactions.
Analysts noted that the GSEs and the US MIs are entities that benefit from the transfer of risk from their monoline balances to various reinsurance counterparties. They both achieve portfolio risk reduction as well as capital relief when supported by qualified reinsurance structures, as well as continuing to find ways to share risk across different balance sheets.
In addition to the record capacity deployed to support US mortgage reinsurance buyers for three consecutive years, analysts say there are two macroeconomic factors affecting reinsurer capacity.
First, mortgage interest rates have risen dramatically over the past 12 months. While most borrowers in reinsurance deals have much lower interest rates than what is currently available, analysts note that they are less likely to repay their loans, prompting them to shed risk. and from current reinsurance deals.
Elsewhere, if the borrower’s home equity increases through home price appreciation, the reinsurers’ modeled risk is reduced. Throughout last year, home prices have flattened to slightly below a national average basis.
Analysts also mentioned 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 manage their exposure to individual balances, and that some reinsurers have limited remaining internal capacity, there is an opportunity for the bag reinsurance capital to support the US mortgage reinsurance business line.”