The LMI battle

by Adam Smith11 Sep 2013

FBAA president Peter White has taken up the banner of LMI transportability, and has said he won’t give up the fight.

FBAA national president, Peter White, is frustrated with lenders mortgage insurance (LMI) providers in Australia, whom he argues regularly exhibit a distinct lack of fairness and transparency  and, in fact, should not be termed ‘insurers’ at all – and it appears many brokers agree.
A recent poll on the Australian Broker website asked, ‘Should LMI policies be made fully transportable?’ – and a convincing 91% of the 145 respondents said they believe it should.
“LMI is a very important part of our sector,” says White, “especially with off-balance sheet lending, but historically there was little or no discourse about the product and who, if anyone, benefited from it – ie, no disclosure at all.”
White, who claims the FBAA has been the sole public voice pushing for disclosures that will come into effect under the NCCP with the key fact sheet modifications, says LMI needs to live up to its name. 
“LMI should be what it states it is – insurance – but it has never complied with the Insurance Act, otherwise it would have had…PDS [product disclosure statement] documents and proper, fair rebates if the policy was terminated early. At this point in time, the only time you might get a rebate on LMI is if you terminate the policy inside of one year (sometimes two) – and only if you ask for it. How can one ask for something they don’t know exists?”
Competition – or lack thereof – is another issue for White, who says the FBAA has been talking to parliamentary ministers about allowing overseas LMI competition to exist in Australia, expanding on a model that exists today.
“Australia has had companies from overseas look at coming into the marketplace with new…products, as they have seen it as a viable market space, but have withdrawn from doing so mainly due to the entry process brought upon them [by APRA]. This means we are missing out on better and more competitive LMI products than what we have today, as it is basically controlled by two companies.
“We are continuing to engage [the government] on this. APRA needs not be an impost for greater competition in the market place from new suppliers and at the moment they appear to be one of the last barriers.”
As for premium fairness, White says competition is definitely key, but that market claims ratios also play a part – and he’s not buying the excuse that LMI providers can look at past data to determine likely default rate spikes amongst particular market segments. 
“Sorry, but that doesn’t wash and is yet another example as to why this isn’t insurance as we would know it. Insurance premiums react to claims losses, which we see every year in the market with our  cars and home insurance. [They’re] not based on would-be, hypothetical, magical figures starting 50-odd years ago, which are predicting with reasonable certainty that there will be more  defaults ‘in the future’.”
Furthermore, he says, it doesn’t take ‘Einstein’ to work out that with more people borrowing money – and therefore paying LMI – that there will be more people making claims. However, the ratio of borrowers to claims is something that will only be known when the time comes. 
“I bet if the ratio is no different, they won’t reduce the premiums to where they were before the 12% increase.
“One thing that is very important to understand is that, whilst this is called ‘insurance’ and we talk about ‘premiums’, LMI is not a true insurance product; hence why there have never been PDS documents and normal rebates one would imagine would be in place.  And LMI is not written under the Insurance Act, which is why they have never had to comply with these normal disclosure requirements and rebates by law.”
White says the FBAA (and he, personally) will not give up on the fight for full disclosure of LMI to borrowers, the need for portability of LMI policies, fair and reasonable rebates on premiums when terminated in a proactive manner and for greater competition in the Australian marketplace – one that isn’t impeded  by APRA or “other bodies”.
However, White is quick to stress that he sees the inherent value in LMI.
“I’m not against LMI. It’s a very important necessity for our industry; it just needs fair play and full disclosure.”