The public hearings which the Productivity Commission has been running in relationship to Competition in Financial Services covered a wide range of issues.
One which has surfaced is the Lenders Mortgage Insurance (LMI) sector. With 20% of borrowing households required to take LMI, and just two external providers (Genworth and QBE LMI), the Commission has explored the dynamics of the industry. They called it “an unusual market”, where there is little competitive pricing nor competition in its traditional form. Is the market for LMI functioning they asked? Could consumers effectively be paying twice?
On one hand, potential borrowers are required to pay a premium for insurance which protects the bank above a certain loan to value hurdle. That cost is often added to the loan taken, and the prospective borrower has no ability to seek alternatives from a pricing point of view.
Banks who use external LMI’s appear not to tender competitively.
On the other hand, ANZ, for example has an internal LMI equivalent, and said it would be concerned about the concentration risk of placing insurance with just one of the two external players, as the bank has more ability to spread the risks. The Commission probed into whether pricing of loans might be better in this case, though but the bank said there were many other factors driving pricing.
All highly relevant given the recent APRA suggestion that IRB banks might get benefit from lower capital for LMI’s loans, whereas today there is little capital benefit.
This will be an interesting discussion to watch as it develops towards the release of the final report.
They had already noted that consumers should expect to receive a refund on their premium if they they repay the loan.
