Over the past four months, the coronavirus has impacted economies, stock markets, and the housing finance space globally. On 9 March, most global markets reported severe contractions, their worst since the financial crisis of 2008 and already colloquially known as Black Monday. Two days later, the World Health Organization declared a global pandemic and 24 hours later Wall Street experienced its largest single-day percentage drop since the Black Monday of 1987.
All of which begs the question: how has the mortgage reinsurance market fared and reacted to these events? Having enjoyed rapid expansion since 2013, has the market proved resilient, or yet another casualty of the current global crisis?
The evidence of the last couple of months shows that there are two positive strands of news to report.
The first is that the reinsurance market remains open for business, and transactions are still being successfully executed. Over the past few months, we have worked on a number of transactions where reinsurance capacity has been available, and at a competitive price given the financial market volatility. A high loan-to-value US transaction – one that relied solely on reinsurance capacity – was successfully placed in April for significantly over $1.0bn of future mortgage originations. This is positive evidence of the market remaining operational and active throughout the cycle and that reinsurance capacity can be relied upon for long-term risk transfer partners.
The second is that reinsurers are actively looking to work with clients in a constructive and collaborative manner. Our experience over the past few months shows that the capacity in the market is open to new transactions, and willing to work with clients on their risk transfer needs in partnership. Within Capsicum Re, we have seen first-hand how this combined approach is allowing clients to seek innovative structures at accurate premium levels given the position of the cycle.
The conclusion is therefore more upbeat than many may expect: reinsurance capacity is here to stay, through the cycle; it can be relied upon and is fundamental to any risk transfer program sought by clients around the globe. This is the first time that reinsurance capacity has been tested since its development in the mortgage indemnity business. Our experience is showing that, thanks to the benefit reinsurers derive from their diversified portfolios of risk, even in times of stress they are willing and able to step up and continue to meet commitments.
As specialist reinsurance brokers, we’re continuing to support clients and markets by working on innovative solutions during this period of the cycle, making sure we continually communicate to markets to stay ahead of the curve on capacity availability. Evidence of the importance of this approach is the high LTV forward transaction in April, referenced above, which we succeeded in placing when no other US transactions were taking place.