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Thursday, 19 October 2006
Page: 160


Mr Martin Ferguson asked the Treasurer, in writing, on 9 May 2006:

(1)   Why has APRA ceased publishing statistics and profit/loss ratios on Lender Mortgage Insurance (LMI).

(2)   How are profit/loss ratios for LMI calculated.

(3)   What were the profit/loss ratios for LMI providers for (a) 1991-1995, (b) 1996-2000, and (c) 2001-2005.

(4)   What was the value of (a) premiums and (b) claims collected by LMI providers for (i) 1991-1995, (ii) 1996-2000, and (iii) 2001-2005.

(5)   What proportion of first home buyers used the first home owners grant as a deposit to satisfy the requirements of LMI providers.

(6)   How many claims have LMI providers met in the past 5 years.

(7)   How will APRA’s most recent changes to the capital adequacy ratio affect LMI providers.

(8)   What is the expected impact of the removal of mono-line restrictions on LMI providers.

(9)   How many LMI providers are currently operating in Australia.

(10)   Which institutions provide LMI in Australia.

(11)   Have there been any applications from intending new entrants; if so, how many.

(12)   What is the Government doing about increasing competition in the industry.


Mr Costello (Treasurer) —The answer to the honourable member’s question is as follows:

(1)   APRA has advised that within its Insight publication, it has ceased publishing separate statistics for Lenders Mortgage Insurers (LMIs) as a sector within Direct Insurers to avoid possible breaches of APRA’s confidentiality obligations. LMI data is included in the “other” category for assets, liabilities and the performance measure tables. However, mortgage insurance is still reported as a separate class of business in the revenue and expense tables.

(2)   There are four profit measures published in Insight, calculated using figures reported in the APRA returns as follows:

(a)   Profit from general insurance (underwriting result + investment income + other operating revenue - operating expenses) as a percentage of net premium revenue (premium revenue - outwards reinsurance expense)

(b)   Operating profit (profit from general insurance - goodwill amortisation - income tax) as a percentage of total revenue (premium revenue + investment income + other operating revenue)

(c)   Operating profit as a percentage of shareholders equity (average of opening and closing balances)

(d)   Operating profit as a percentage of total assets (average of opening and closing balances)

(3)   and (4) Current profit/loss ratios for LMI are not comparable to periods prior to 1 July 2002. At that time, APRA changed its reporting regime to a prospective basis which removed the unearned premium and deferred acquisition cost components of AASB1023 and replaced those with a requirement to provide for premium liabilities (PL). PL recognises claims that have not yet been incurred but are expected to be incurred over the remaining period of the current book of business. Premium income figures also changed as a result of APRA’s new reporting regime. Premium income from that date needed to be fully recognised when written on a prospective basis from the date of acceptance of the contract rather than on an earned basis as required by AASB1023. This change increased premium income in comparison to prior years. The below enables calculations for each of the profit measures on a year-by-year basis to facilitate comparison. Data has not been provided for the 2002 and 2003 years as these figures are distorted by the one-off effects of change in reporting requirements. Given the change referred to above, caution should be exercised when making direct comparisons between periods after and before 1 July 2002. There is a large negative incurred claims figure for the 2004 year which resulted from revaluation of the reserves created in 2002 and 2003 and which is not necessarily indicative of normal claims activity.

(i)

Item ($’000)

1995

1994

1993

1992

1991

Gross Premium revenuea

65,023

62,831

54,101

27,327

na

Net Premium revenuea

49,967

42,907

38,307

24,056

31,550

Gross Claims incurred

21,765

9,584

40,262

84,314

na

Net claims incurred

15,142

11,160

23,772

37,332

19,721

(ii)

Item ($’000)

2000

1999

1998

1997

1996

Gross Premium revenuea

170,762

108,222

81,261

38,879

68,106

Net Premium revenuea

120,885

82,010

60,102

29,740

56,880

Gross Claims incurred

29,087

17,021

20,261

14,567

50,520

Net claims incurred

21,928

12,451

14,225

9,098

40,566

(iii)

Item ($’000)

2005

2004

2003

2002

2001

Gross Premium revenuea

716,549

565,848

na

na

224,710

Net Premium revenuea

584,767

464,404

na

na

167,128

Gross Claims incurred

110,547

-103,792

na

na

49,405

Net claims incurred

143,275

-87,337

na

na

43,121

a Premium figures prior to July 2002 are given on an earned basis.

Period

Item ($’000)

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

Profit from general Insurance

540,474

605,938

na

na

185,351

174,728

58,322

67,992

34,190

28,380

55,409

13,308

15,819

-17,724

-8.909

Operating profit

383,644

444,998

na

na

131,105

128,534

45,977

51,403

21,800

19,007

36,197

11,187

12,891

16,062

-12,204

Net premium revenue

584,767

464,404

na

na

167,871

145.313

93,776

62,666

29,740

56,880

49,967

42, 907

38,307

24,056

31,550

Total revenue

783,441

616,223

na

na

250,296

245,013

109,972

114, 853

58,415

95,661

95,306

43,831

61,578

40,896

49,465

Shareholders equity

2,862,433

2,153,160

na

na

921, 354

667,097

522,529

417,795

346,200

288,470

218,189

157,943

177,532

144,825

88,830

Assets

3,960,309

3,306,354

na

na

1,828,267

1,370,215

1,055,092

750,199

584,268

532,260

440,399

404,213

376,158

262,497

190,503

(5)   This is not collected by APRA.

(6)   This is not collected. APRA collects the number of open claims at balance date and does not indicate the level of claims met during the financial year.

(7)   One of the main impacts of APRA’s improved capital framework for LMIs, which came into effect from 1 January 2006, is that LMI capital requirements are more appropriately aligned to risk. This will afford increased protection to policyholders. The framework also reduces inconsistencies in the prudential regulation of LMIs and authorised deposit-taking institutions, ensuring that similar risks are treated in a similar manner.

(8)   The mono-line restriction has not been removed.

(9)   There are currently nine LMIs authorised to carry on business and a further four in “run-off.”

(10)   Those LMIs authorised to carry on business are:

  • Permanent LMI Pty Limited
  • PMI Mortgage Insurance Ltd
  • Western Lenders Mortgage Insurance Company Limited
  • ANZ Lenders Mortgage Insurance Pty Limited
  • Westpac Lenders Mortgage Insurance Limited
  • The Mortgage Insurance Company Pty Limited
  • Mortgage Risk Management Pty Ltd
  • Sunstate Lenders Mortgage Insurance Pty Ltd
  • Genworth Financial Mortgage Insurance Pty Limited

   The LMIs in “run-off” are”

  • PMI Indemnity Limited
  • Vero Lenders Mortgage Insurance Limited
  • AMPG (1992) Limited
  • Colonial Protection Insurance Pty Limited

(11)   To date there have been no formal applications lodged by any intending new entrants.

(12)   The Government aims to provide a competitively neutral regulatory environment which supports competition in the industry and between industries in the financial sector. Any new entrant would have to meet the same prudential requirements that apply to LMIs currently operating in the Australian market. These requirements provide for financial stability and consumer protection in the insurance sector. Australia’s prudential framework aims to treat the same risks in the same way regardless of the institution or industry sector. Regulation should not artificially favour or disadvantage any particular section of the market —the same risks should be regulated in the same way regardless of the institution holding that risk or the type of instrument being used. As outlined in the answer to Question 7, under new arrangements, prudential requirements for LMIs are more appropriately aligned with the risks that they face and with other institutions with the same risks.