Long-term credit risk on mortgage loans gives specific methods of its measurement, control and regulation. This, in turn, gives the insurance unique features, such as nature of the risk on the portfolio over time (pool) of mortgage assets.
Periods of relatively low correlation risk (periods of stability) followed by periods of extremely high degree of interdependence of private risk (correlation) in periods of economic downturn, when there is a simultaneous deterioration in the quality and value of mortgage assets.
This important fact can not use traditional methods of risk diversification, based on the statements of the theory of marginal probabilities (insurance valuations). It requires the invention of appropriate methods of measurement and diversification in time (extremely long periods of time). Therefore, the time for insurance is the most significant coordinate in matters of measurement and risk management.
For proper insurance valuations of the parameters of the random variable (for example, the expected loss) periods of actual observations that are sufficient for the traditional types of insurance (relatively short mutually independent insurance risks) are not sufficient for insurance valuations.
Even 5 – 7 years of history, in which there were no serious macroeconomic changes, and there was a steady trend, can not provide a reliable indicator (long-term) future market behavior.
Therefore, the fundamental task for the mortgage insurer is not so much the estimation of parameters (such as the probability of default within a year), which is valid in the short horizon, as long simulation of random processes of the future development of the mortgage assets.
Adequate assessment of the value of the future cash flow should take into account an adequate answer to the question of distribution of insurance reserves in time, which is also special for insurance valuation.
In addition to the non-uniformity of risk on individual mortgage (pool of loans), noted above uneven correlation leads to the necessity of dividing the allowance for expected and unexpected, similar to the way the bank must divide the distribution of expected losses (reserve) in the horizon of 1 year and unexpected (capital).
The division should take place on the grounds of the release rate and the required savings. Provision for unexpected losses mortgage insurer (contingency reserve) plays the role of capital, which in the mortgage insurance is becoming one of the main parameters of solvency.
Regulation of mortgage insurance in those countries where it has been operating for decades, has a special, separate character (similar to the way life insurance is allocated to a separate regulation). Here are his main points: Nature of the companies operating mortgage insurance (insurance only legal restriction of credit risk for mortgages).
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