Mortgage insurers have been issued with new guidelines setting out the regulatory framework within which OSFI assesses whether a mortgage insurance company maintains adequate capital.
The new rules, called the Mortgage Insurer Capital Adequacy Test (MICAT) will come into effect on January 1, 2019.
“Having a separate guideline for mortgage insurers allows OSFI to better tailor its capital framework to the mortgage insurance industry,” said Carolyn Rogers, Assistant Superintendent.
Canada’s largest private mortgage insurer Genworth has reacted to the announcement Thursday.
It says the guideline includes three primary changes:
- The base total asset requirement, which is primarily based on loan-to-value, credit score, outstanding insured balance and remaining amortization, is increased by 5% relative to the current calculation.
- The 2019 MICAT guideline requires the use of credit scores at the time of origination in the calculation of a base total asset requirement throughout the duration of the mortgage insurance coverage. This eliminates the requirement in the existing regulatory capital framework to use the updated 2016 credit score for 2015 and prior books in the calculation of the base total asset requirement.
- There is a transitional arrangement that provides a phase-in period for the increased capital required for insurance risk on outstanding insured mortgages as at December 31, 2018.
Genworth says that it concurs with OSFI that the new guideline “is not expected to have a material impact on the regulatory capital for mortgage insurers.”
Its assessment of the impact of the changes considers existing insurance in force and new business written after the changes are introduced.
- Expected impact on required capital for existing insurance in force
Overall, the Company expects the impact of the elimination of the one time update to credit scores for 2015 and prior books should more than offset the 5% increase in the base total asset requirement on existing insurance in force. Furthermore, the transitional arrangements should run off in the first half of 2019 and should permit the Company to operate on a more capital efficient basis thereafter.
- Expected impact on required capital for new insurance written in 2019 and thereafter
For transactional new insurance written in 2019 and thereafter, the Company estimates that the 5% increase in the base total asset requirement for insurance risk could reduce the lifetime operating return on equity by approximately 1% on new business, assuming the current pricing level and a long-run loss ratio range of 20 to 25%. With respect to the regulatory requirement to conduct an annual pricing review that applies to all mortgage insurance companies, the Company will take into account the increased capital requirements for new insurance written in 2019 and thereafter.
- Expected MICAT impact in 2019
The Company believes that the total regulatory capital requirements in 2019, at its targeted operating MICAT range of 160 to 165%, should be marginally lower under the new MICAT guideline as compared to the existing regulatory capital framework. If the Company operates within its targeted MICAT operating range in 2019, the Company's operating return on equity for 2019 should be modestly higher under the new MICAT guideline as compared to under the existing regulatory capital framework.
Genworth says it expects to be fully compliant with MICAT upon its implementation on January 1, 2019, subject to business and market conditions.