Effective June 19, 2023, CMHC increased its mortgage loan insurance premium rates for multi-unit properties. The premium rates will increase by 1.55% for MLI Select (multi-unit residential) properties and either 0.85% or 0.75% for standard rental housing, retirement and supportive housing, and student housing/single room occupancy (SRO) properties.
These changes reflect CMHC’s adoption of the IFRS 17 (International Financial Reporting Standard 17), an accounting standard that governs how insurance contracts are reported in financial statements. Certainly, CMHC needed to adopt the new accounting standard, but that doesn’t mean they need to conduct business in the same way.
In the insurance industry, insurers have been using mechanisms such as securitization to transfer risk. This process involves two key steps:
- Insurers transform the liquidity they generate from underwriting insurance into financial instruments, such as notes, that are traded in the financial markets.
- Insurers then transfer the risks they have underwritten to the financial markets by trading these notes, effectively shifting the risk to investors.
I remember working at an insurance company that securitized its life insurance portfolio. The purpose of this securitization was not to raise funding, but to transfer a line of business that could be financed more effectively outside the constraints of regulatory capital requirements.
CMHC is facing a similar challenge. The question is whether there are risk transfer mechanisms, such as securitization or synthetic risk transfer, that would allow for better capital allocation despite the constraints imposed by IFRS 17. While the 1.55% increase for MLI Select may not seem like much, it impacts the viability of affordable housing projects.
As a large financial institution, CMHC should leverage the tools available to optimize its capital and financing structures. The goal is not to improve profits but to enhance the efficiency of the housing finance system by optimizing its operations.
Independent Opinion
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