The Office of the Superintendent of Financial Institutions (OSFI) on Friday released for comment a draft advisory updating the capital requirements for mortgage insurers, designed to account for the increase in residential mortgage insurance risk and declining housing affordability.
"The planned changes to the regulatory capital framework for mortgage insurers will ensure that capital requirements keep pace with market conditions and more accurately reflect the underlying risks," OSFI says in a news release.
The initiative aims to improve how mortgage insurers measure their capital positions, OSFI says, and to position them to withstand losses. The proposals are expected to change each company's capital ratio, it adds.
"Overall, the supervisory target requirements are expected to increase while the internal target requirements will need to be reassessed by mortgage insurers in light of the new standard approach," OSFI says.
The proposed new approach is more risk sensitive, OSFI notes, and incorporates new risk and loss drivers, including creditworthiness, remaining amortization, and outstanding loan balance.
"When house prices are high relative to borrower incomes, the new framework will require that more capital be set aside," says Superintendent Jeremy Rudin. "Ultimately this will continue to provide a level of protection to both policyholders and unsecured creditors."
The new regime will come into force on Jan. 1, 2017. Comments on the draft are due Oct. 21.
Photo copyright: xixinxing/123RF