Brad Gile
-----Original Message-----
From: sam.gutterman@us.pwcglobal.com <sam.gutterman@us.pwcglobal.com>
To: cj_townsend@uk.cu.com <cj_townsend@uk.cu.com>
Cc: casnet@lists.casact.org <casnet@lists.casact.org>
Date: Wednesday, October 28, 1998 2:18 PM
Subject: Re: PMI and Catastrophe's
>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
>
>
>
>
>
>Visit the CAS Web Site at http://www.casact.org
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