Dislocation of capital markets has already seen the reinsurance sector radically boost its share of the risk transfer market for mortgage insurance, according to Krohn.

Reinsurance rates are up dramatically in the segment from a year ago, far more than any rise in the underlying risk, he said.

“Rates are up 60-80 percent,” said Krohn. “There’s no doubt risk is up, but using different modelling platforms it’s up 10-20 percent. So you’re getting a fourfold increase there on rates over the risk.”

The dual execution within the segment is behind this, he explained, between reinsurance and capital markets – which have broken down while spreads have widened.

“That is leading pricing higher than reinsurers probably would have otherwise charged, had that not existed. That’s compelling for reinsurers to continue to write this business,” he said.

Despite this, few reinsurers have entered to take advantage of the situation.

“Shockingly, we’re not seeing new entrants, like you would think you would see in a market like this,” he said. “I think that’s because some of the market leaders that have been writing this business have acted decisively, on back-to-back disruptions in the market with the pandemic, financial markets and changing geopolitical situation.”

Krohn also acknowledged these market leaders have had to absorb a threefold increase in credit risk transfer issuance within the past year.

“They’ve absorbed that really well, so not a lot of markets have come in to take up that void. But it’s a lot of capacity to take down, and it is weighing on reinsurers’ aggregates. It’s bound to have some impact going forward, but it’s an opportunity for new markets to step in. There’s plenty to go around.”

Growth factors

The strong growth in the mortgage reinsurance market seen in the past year can be accounted for by two macroeconomic factors, he explained.

“One is lower interest rates following the pandemic, creating lots of mortgage originations. A lot of those originations haven’t yet made it to the credit risk transfer market, but have contributed to this growth significantly,” said Krohn.

The other factor acknowledges the choice that mortgage insurers have between using capital markets or, increasingly, turning to reinsurance.

“The allocation to the reinsurance market has increased significantly with inflation and the dislocation of the capital markets. Historically, it had been something like 75 percent capital markets, 25 percent reinsurance markets, but now it is closer to 40-50 percent, and even higher in certain segments,” he said.

Interest rates can be counted on to rise in 2023, impacting demand for buying property and paying for mortgages.

“It’s going to impact affordability of mortgages for borrowers, so that’s probably the biggest headwind,” Krohn said.

“But the tailwind here is the limited supply of homes in the market, whether it’s in the US, Australia or other places. The demand to buy homes by first-time homebuyers is really supported by this millennial generation and that demand stays strong and looks to be strong for several years following 2022 and 2023,” he added.

Watch the full interview with Guy Carpenter’s Jeffrey Krohn filmed on the balcony of The Insurer TV’s pop-up studio suite in the Hôtel de Paris. View for more on:

  • A decade of tremendous growth
  • Reinsurers vs capital markets in the sector
  • Drivers behind the dramatic rate rises in 2022
  • Market outlook