Magazine article Mortgage Banking

Expect Higher Insurance Premiums for Corporate Coverages. (Executive Essay)

Magazine article Mortgage Banking

Expect Higher Insurance Premiums for Corporate Coverages. (Executive Essay)

Article excerpt

INSURANCE RATES FOR ALMOST EVERY industry segment are on the rise. Many property programs are seeing dramatic increases--some as high as 200 percent to 300 percent. Because mortgage bankers are a part of the larger insurance universe, they are not exempt from the effects of the rest of the market. Right now, there is a "hard" insurance market, which means prices are firming overall--so mortgage bankers are seeing a rise in rates.

Mortgage bankers in the Mortgage Bankers Association of America--endorsed Mortgage Bankers Bond program are faring better than other businesses and even other financial institutions as a group. On average, Mortgage Bankers Bond rate increases are coming in at only 15 percent to 20 percent, so mortgage bankers may come out relatively unscathed during this time of escalating insurance rates.

In addition to the current hard market, growth in a mortgage banker's portfolio will also factor into premium increases. The year 2001 was a record mortgage banking year: $2 trillion in residential originations. That's double 2000's volume of $1 trillion. Growth in a mortgage banker's business, in addition to the insurance market changes, will also cause increases in insurance premiums.

If the firm's staff, branches, originations and servicing portfolio are about the same size, the bond increase will probably be around 15 percent to 20 percent. However, if these factors increased, as is quite likely in this booming mortgage market, this will further impact the ultimate premium charged. For example, if a mortgage banker's originations increased 20 percent over the prior year coupled with rates increasing 15 percent to 20 percent, this might result in a 25 percent to 30 percent increase in premium.

The events of Sept. 11 are not the only cause for increased premiums. The market was hardening before Sept. 11 as the result of several converging factors--increased claim activity, past competitive pressure driving down prices and the current investment environment--that have reduced insurance company returns.

Claims activity has been increasing over the last few years. There have been a number of catastrophes and incidents during recent years involving employee dishonesty, weather, plane crashes, worker's compensation and large liability suits. To add to the deficit, premiums have been low, or "soft," due to competition and excess capacity. Claims have been greater than premiums for a few years.

During this time, investment returns have been high enough to compensate insurance carriers for the negative premium-to-claims ratio. Now, due to the 2001 downturn in both the stock market and interest rates, investment returns can no longer cover the losses alone, so the insurance industry as a whole is caught in a negative position. …

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