Banks encouraged to look offshore for LMI

Speaking to Mortgage Business, Deloitte partner of consulting Rick Shaw said that there is growing interest in the offshore LMI market among Australian banks.

“Westpac did a deal through their LMI captive into an offshore insurer,” Mr Shaw said. “I’m not privy to the structure of the Westpac deal but I think there may be some innovation there that wasn’t available in the local market.

“It’s kind of a public secret that APRA approved the structure that they put forward. There is encouragement of other money coming in.”

Genworth’s share price took a hammering in February when Westpac announced that it would no longer be using the US-owned group for its LMI needs. Westpac mortgages with an LVR above 90 per cent are now insured by Bermuda-based Arch Capital Group.

Mr Shaw says using offshore LMI players is something that "we should all be comfortable with".

“Our biggest risk in Australia is our exposure to our housing market,” he said.

“If we can share that risk more broadly outside the Australian market I think that is something the regulators and us as Australians should have some comfort with.”

Mr Shaw said the Australian LMI industry is a duopoly, with Genworth and QBE LMI maintaining large exposures.

“It has been a profitable duopoly and there are other parties coming in who are interested who may have innovative solutions.”

Australian mortgage insurers have felt the impact of regulatory changes in recent months.

Last month, Australian insurance giant QBE admitted that regulatory pressure on the banks to tighten mortgage lending has had a significant impact on new LMI business flows.

Announcing its half-year profit results, QBE noted that strong property price appreciation, particularly in NSW, has led the Reserve Bank and APRA to pressure the banks to tighten credit terms and conditions in the mortgage market, which has flowed through to significantly reduced new business flows in its lenders’ mortgage insurance business.

QBE’s chief executive of Australia & New Zealand operations Colin Fagen said the group revised its 2014-15 gross written premium expectations down by around five per cent or $200 million.