The Office of the Superintendent of Financial Institutions Canada (OSFI) has released the final version of new capital requirements for mortgage insurers that aim to modernize the approach to ensuring these firms can withstand a major downturn in the housing market.
OSFI’s new requirements “define a new approach for the regulatory capital requirements for mortgage insurance risk that is more risk sensitive and incorporates key characteristics such as borrower creditworthiness, outstanding loan balance, loan-to-value ratio, and remaining amortization,” the federal regulator states.
The new requirements, which will take effect on Jan. 1, 2017, aim to ensure “a level of conservatism in the protection provided to policyholders and other creditors of the mortgage insurers, and is adaptable to future changes,” OSFI says.
The new standards are intended to establish the right risk-management incentives for mortgage insurers; to create a framework that is adaptable to future changes in accounting standards; and to do a better job of setting capital requirements.
The new requirements, OSFI says, introduce “a new standard approach that updates the capital requirements for mortgage insurance risk and increases the probability that mortgage insurance companies can absorb severe but plausible losses.”
The requirements were proposed in September and OSFI says it made several changes resulting from the feedback it received during the consultation period.
For example, OSFI has introduced transition arrangements on the use of borrower credit scores; simplified and recalibrated the formulas for determining supplementary capital requirements; and added formulas for determining the requirements when the term of insurance is less than five years.
“The market has evolved considerably since the capital framework for mortgage insurers was last updated,” says OSFI superintendent, Jeremy Rudin, in a statement. “The new framework places us at the vanguard of understanding and quantifying the risks in mortgage insurance.”
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