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| Rationales of Mortgage Insurance Premium
Structures Author: Barry Dennis, Chionglong Kuo, and Tyler Yang Start Page: 359 Abstract: This paper examines
the rationales for the design of mortgage insurance premium structures. The actuarially
sound premium prices of several widely used structures are formally derives. Two types of
cross-subsidization are identified in different structures: (1) subsidization across
termination years and (2) extra-subsidization of defaulters by non-defaulters. Because
these two types of subsidization exist to different degree among the structures, a
borrower may self-select into certain structures to maximize (minimize) the benefits
(losses) of cross-subsidies. Adverse selection arises when the borrower's characteristics
cannot be completely observed by the insurer. The actuarially sound premium prices should
be adjusted for such adverse selection behaviors. Numerical examples are provided to
illustrate such adjustments. |
