Aon  |  Financial Institutions Practice
Mortgage Hazard & Impairment

The mortgage market depends on an insurance framework that mixes physical and credit protections, but as the global and US economies begin to move forward amid the ongoing global economic impacts of COVID-19, vigilance and advanced planning will be critical to manage compounding perils.

The outlook: a focus on climate

Aon’s Weather, Climate & Catastrophe Insight report reveals that the 416 natural catastrophe events of 2020 resulted in economic losses of USD 268 billion – 8% above the average annual losses for this century1– as costs continue to rise due to a changing climate, more people moving into hazard-prone areas and an increase in global wealth. Of this total, private sector and government-sponsored insurance programs covered USD 97 billion, creating a protection gap of 64%, which is the portion of economic losses not covered by insurance2.

Meanwhile, in the last decade, the mortgage market has undergone radical change. Large banks capable of shifting capital from region to region have diminished as participants, and non-banks heavily invested around loans with complex servicing and conveyance requirements have filled the void. The new participant pool may be smaller and less capitalized, and unlike their large bank predecessors, may not be bound by the regulation of Basel III or similar capital requirements. This shift has perhaps departed from traditional structure and security, and the implementation of updated risk management strategies is critical.

Mortgage hazard and impairment solutions include:

Government-sponsored enterprises: structuring innovative risk solutions to address mortgage servicing and housing market-related risks, such as partnering with the GSE’s on a credit risk transfer program.

Non-bank servicers: advisors and brokers provide project-based work with responsibilities including overseeing hazard and flood rate benchmarking, REO pricing, flood assessments, catastrophe modeling, claims analysis, policy coverage reviews and general underwriting compliance.

Banks: by leveraging insurance market relationships, specialist brokers place LPI, REO and mortgage impairment for all segments. Standalone projects have included LPI rate reviews, excess coverage for captives, REO pricing, flood assessments and catastrophe modeling.

Affiliate solutions: regional banks and credit unions can access lender placed brokerage services, including an online portal to procure coverage, produce notifications, and track claims for mortgage operations in every sector of the industry, including regional banks.

Focus at the corporate and federal levels will be critical around investments in risk mitigation, resilience, and sustainability as the cadence of Climate adaptation and solutions continues to accelerate with renewed urgency. The timely evaluation of novel products like catastrophe bonds and parametric insurance policies will become an important part of mortgage market risk management.