Arch Mortgage Insurance's new
The RateStar program, which Walnut Creek, Calif.-based Arch announced in October, uses numerous variables to set premiums, including traditional criteria like a borrower's loan-to-value ratio and FICO score. American International Group's United Guaranty has a similar program.
Risk-based programs are intended to provide flexibility on premiums. They create the opportunity to charge lower premiums to borrowers deemed less risky, and higher premiums to borrowers with poor credit scores or who display other signs of risk.
Bose George, an analyst at Keefe, Bruyette & Woods, has expressed concern that, in response to Arch's RateStar program, other insurers adopt discounts for their rate card pricing programs. One possible indicator is National Mortgage Insurance recent "flattening" of its rate card.
Both Arch MI and National MI have said that they are not cutting prices, George noted.
But a wave of concern has been unleashed. United Guaranty introduced its own risk-based pricing program in 2010, called Performance Premium, and it was a success, leading to profit growth. By the third quarter of 2012, less than two years after the introduction of Performance Premium, United Guaranty had become the
"The auto insurance industry went through a similar transformation about 10 years ago," Don Thorpe, senior director of insurance at Fitch Ratings. said in an emailed comment. "Early adopters had a competitive advantage over their peers because those peers suffered from adverse selection (the good driving risks moved to the insurers offering the sophisticated underwriting, leaving the poor driving risks with the other insurers)."
"The other MIs will change their underwriting approach if it becomes a competitive advantage for the mortgage lender (like the ability to pass on a lower price to the borrower)," Thorpe said.
RateStar, which went live on Dec. 7, could also help Arch by allowing its lenders to offer a more attractive price, which could lower the cost for the borrower, said David Gansberg, chief executive.
The pricing change is "consistent with the way we've tried to manage our other businesses, by bringing analytics to help create business opportunities," Gansberg said.
"Arch wants to better align risk with pricing and improved portfolio management capability that will allow it to weather difficult times," he said.
Regardless of which direction the other MI industry players move, they don't need to worry about the government-sponsored enterprises blocking their path. The GSEs do set
"MIs do not need our approval for how they price their policies," Fannie Mae said in an email. Rates are filed with state insurance regulators for their approval.
Arch's competitors have suggested that they are thinking along the same lines as Arch, if not necessarily in full agreement.
"The current approach of risk-based pricing through a rate card adds more transparency," Mike Zimmerman, a senior vice president at MGIC, said in an emailed comment.
Radian Guaranty has made its rate card "more granular over the last few years and we've also improved our risk analytic tools, which allow us to have even more the view of what we should be doing from a pricing point of view," President Teresa Bryce Bazemore said during the company's third-quarter conference call.
Essent's chairman and CEO, Mark Casale, said he doesn't expect the industry will fall in line behind Arch and United.
"I wouldn't look at any one competitor's pilot rate program or other type of introduction to pricing as something that's going to take hold of the industry," Casale said during the company's third-quarter conference call.
"Whether through rate cards or pricing engines, we believe the industry continues to migrate towards more granular risk-based pricing," he said.
