Bulk Insurance (a.k.a. Portfolio Insurance)
Bulk insurance, also known as portfolio insurance, is a type of mortgage default insurance.
Lenders buy bulk insurance on their low-ratio mortgages for three reasons:
- Capital relief (lenders need to maintain less capital for mortgages that are insured)
- Risk reduction (bulk insurance covers the lender in the unlikely scenario that a borrower with 20%-plus equity defaults and the lender can’t recover its principal)
- Securitization (insured mortgages are easier package up and sell to investors)
CMHC summarizes portfolio insurance as follows:
“Portfolio insurance helps lenders manage their capital more efficiently and small lenders to compete on an equal footing with large lenders. It allows more lenders to compete in the mortgage loan insurance market by lowering entry barriers, thus expanding consumer choice.”