Re: PMI and Catastrophe's

( sam.gutterman@us.pwcglobal.com )
Wed, 28 Oct 1998 13:35:30 -0600

I certainly agree about the significance of the catastrophe risk involved
in mortgage guaranty insurance. Note that in the 1930s in the U.S. the
entire mortgage guaranty insurance industry went bankrupt. In the 1980s,
with the oil patch real estate problems (and others), about half the
industry left (certainly the part that thought that profit margins were
very large and easy). Currently, in order to be licensed to write this
business, a company has to be a monoline writer, of which there are eight
or nine active insurance carriers, but many banks and financial
institutions are getting involved through reinsurance. Having been
involved in this industry for more than ten years myself, I have
experienced its cyclical nature -- How would you like to have a
significant percentage of your business terminate when interest rates
decrease? How would you like to have many non-independent risks on your
books?

If any of you are curious about this subject, please attend the concurrent
session at the November CAS meeting covering mortgage insurance, moderated
by John Gibson. The panel members are quite knowledgable about this topic.

Sam Gutterman

cj_townsend@uk.cu.com on 10/28/98 08:45:24 AM
To: casnet@lists.casact.org @ Internet
cc:
Subject: PMI and Catastrophe's

One thing I havn't seen in the discussion of PMI is talk about the
catastrophe
exposure of the insurers. I'm not talking about earthquake/hurricanes,
where
ordinary P&C insurance helps preserve the value of the asset. I'm talking
about items like recessions and tax changes.

In 1990 in the United Kingdom, housing (and property) prices where had been
going up exponentially for some time. Mortgage laons at 0% down (with
insurance) were common. In mid-1990, a tax change substantially reduced
the
mortgage interest deductibility for many two income families. Old loans
had
some grandfathering, so there was a big push to complete sales before the
tax
change. At the same time, the UK was one of the first countries to enter
the
recession of the early 1990's. Result - housing prices nose dived
immediately
after the tax change, and stayed down for several years, at the same time
as
default rates skyrocketed due to the recession. Suddenly, there was a lot
of
red ink in mortgage insurers results! In Canada at the same, the major
mortgage insurer competing with the government was forced to turn away new
business due to impairments of capital.

So at the very least, one should look at the results of mortgage insurers
over
an economic cycle or two. Geographic diversification may help, but may not
be
enough in today's correlated financial markets. Imagine the impact if
Internal
Revenue changed the rules to limit tax deductibility of mortgage interest
to
the first L100,000 of the mortgage - timed to take effect April 1, 1999,
just
when we realize that Mr. Greenspan has overreacted in raising interest
rates,
and is pushing us into a recession!

CJ Townsend
CUCAN, VP & Actuary

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