Nick Wild, of JLT Insurance Management in Guernsey, discusses how the company created innovative solutions for the housing and mortgage markets in the wake of the financial crisis.
I believe innovation is often driven by necessity, as it is hard to innovate and easy to replicate. However, replication does not work when there has been a shift in the underlying economic environment.
The current financial crisis has its roots in substantial failures in the US housing and mortgage markets. It is not my intention to discuss the causes but it is important to understand the consequences and how this led to the need to innovate. The global financial crisis left the UK mortgage market without the support of a viable Mortgage Insurance (MI) product and that left the borrower with few mortgage lenders that could afford to lend at 95% Loan to Value (LTV). Under Basel rules, the capital charges on loans of 95% LTV are very high.
All of this at a time when the UK needs 250,000 new homes per annum to meet the needs of the population, with borrowers unable to raise deposits of as much as 25% to access affordable mortgages.
JLT identified the vacuum in the market and assembled our team with expertise in MI. The firm partnered with the key stakeholders to ensure we created a solution that worked for all. For three years, this team developed many derogations of the final scheme as we struggled to attain the innovation required to ensure a successful launch.
Along the way, the team innovated in the following areas:
- Identifying a party to pay the premium and provide the risk capital. We worked closely with the Home Builders Federation and their members, who are the party that pays for this solution for new build homes.
- Creating an insurance vehicle to deliver the cover. We determined that a protected cell company (PCC) located in Guernsey would provide flexibility and security for all the scheme participants. This is the first time a PCC has written MI.
- Designing the insurance policy to provide cover for seven years with a depth and certainty of coverage that would obtain capital relief for the lenders was extremely challenging.
- Bringing Government to the table for the first time as a provider of MI capacity. The Government provides a financial guarantee to the PCC, which enables it to deliver the depth of cover required for capital relief.
- Getting lenders to accept the policy would work for them and that it could deliver the security they require as well as capital relief. The lenders are the insured and under the policy they control the funds in the PCC.
- Catering for the largest to the smallest builders in the country was a scheme requirement and was solved by the development of Multi User Cells (MUC) in which liabilities are borne by individual participants as well as a level of mutualised risk taking. These are the first MUCs to be created in a PCC.
- Cash flow is vital to builders and Cell Capital and Premium is paid from the proceeds of each house sale. This runs counter to the norm, which is to fund Solvency Capital in advance of accepting risk.
These seven innovations required close liaison with many parties including the Financial Services Authority and the Guernsey Financial Services Commission and we are most grateful for their input to the NewBuy mortgage scheme that was launched in March 2012.
The NewBuy scheme now has 85 participating builders. HBF Insurance PCC Limited is sponsored by the Home Builders Federation and is operating with 50 cells providing cover to six lenders. It has potential underwriting capacity of £1.6bn, which is sufficient to insure mortgages of £18bn. We believe that NewBuy has the potential to make a very substantial contribution to regenerating the mortgage market and the construction of new homes in England. A similar scheme has been launched by the Scottish Government.
Originally published in Captive Review, May 2013.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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