Little incentive to use LMI, says insurance provider

LMI players have been criticised recently for the lack of competition within this market – but QBE believes the future of LMI could be threatened unless the government takes one important step



QBE believes the Murray inquiry should recommend capital relief be given to internal ratings based lenders that utilise lenders mortgage insurance, or the future of the insurance product could be threatened.

In a paper to the financial systems inquiry – submitted by group CEO John Neal and Australia and New Zealand CEO Colin Fagen – QBE said this recommendation should be implemented to recognise the “important role that LMI plays in the financial system” and to increase competition between lenders.

LMI has been a “critical component” of the housing market since 1965, but currently internal ratings based (IRB) lenders receive no capital benefit for the use of LMI, despite the fact that the LMI providers hold significant capital for the risk that is transferred, QBE said.

“There is currently little capital incentive for the home lending market to use LMI because of the increasing dominance of IRB lenders, together with a lack of regulatory recognition for IRB lenders use of LMI when modelling reduction in credit losses.

“In the absence of such regulatory or structural incentives, QBE is concerned about the ongoing viability of LMI as a product. This in turn may place at risk both the accessibility to home ownership and affordability of homes within the Australian housing market.”

Under existing Basel II arrangements, there is no capital incentive for IRB lenders to use LMI on residential mortgages.

“Following the implementation of Basel, APRA has required all IRB lenders to maintain a floor of 20% for the Loss Given Default (LGD) on residential mortgages,” QBE said.

“This floor has been the adopted assumption for LGD for mortgages with and without LMI protection, giving no recognition for the use of LMI by lenders and effectively negating any capital benefits for LMI.”

QBE said when there is an absence of regulatory or structural incentives for using LMI, market forces may drive LMI as a product out of the market, such as in New Zealand, where LMI is no longer available.

The LMI provider – which dominates the Australian market along with Genworth – recommended capital relief be provided to all IRB lenders that utilise LMI.

Both the Housing Industry Association and Finance Brokers Association of Australia criticised the lack of LMI market competition in their own submissions to the inquiry.   

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