Is the need for third-party LMI necessary?

by Julia Corderoy26 May 2015
Westpac’s revised mortgage insurance arrangements may be indicative of a trend towards reduced usage of domestic third-party LMI providers in the mortgage sector, according to a leading ratings agency.

According to reports last week, Westpac Banking Corporation advised its mortgage brokers that it had revised its mortgage insurance arrangements so that all new Westpac-originated loans with a LVR above 90% would be insured with its captive mortgage insurer, Westpac Lenders Mortgage Insurance Limited and reinsured with Arch Capital Group Ltd. 

Westpac’s move follows its earlier disclosures and the Genworth Australia announcement in February that Genworth’s contract for the provision of LMI to Westpac was being terminated. 

According to Moody’s vice president, senior credit office, Ilya Serov, Westpac’s move may be indicative of a longer-run trend towards reducing the usage of domestic mortgage insurance products, in favour of other product innovations.

“Australia’s major banks are not currently deriving regulatory capital benefits from using LMI,” Serov said in a market update.

“Similarly, product innovation, such as the use of self-insured low-deposit mortgage products, will affect the need for third-party LMI. Diminished third-party LMI usage elevates the insurers’ risk of losing pricing power and reducing their customer base, putting downward pressure on the firms’ profitability and volumes.”

Westpac’s decision to shift its mortgage insurance policies away from domestic third-party LMI providers is "credit negative" for Genworth Financial Mortgage Insurance Pty Ltd and QBE LMI, says Serov.

“Westpac accounted for around 14% of Genworth Australia’s gross written premium during 2014, and potentially a meaningful, albeit undisclosed, proportion of QBE LMI’s business,” he said.

“At the same time, existing policies will not be affected and the effect on the insurers’ net earned premium should only become material beginning in 2016.”