Submission DR121 - Genworth - Competition in the Australian Financial System

Genworth Financial Mortgage Insurance Pty Limited

Genworth’s second response to the Inquiry into Competition in the Australian Financial System

29 March 2018

Mr Peter Harris

Presiding Commissioner

Productivity Commission

4 National Circuit

Barton ACT 2600

Via email: financial.system@pc.gov.au

Dear Mr Harris,

Genworth’s second response to the Inquiry into Competition in the Australian

Financial System

Genworth Mortgage Insurance Australia Limited (“Genworth”) welcomes the Productivity

Commission’s Draft Report into Competition in the Australian Financial System (the Draft

Report), and in turn, the opportunity to respond to the Draft Report.

Genworth is a leading provider of lenders mortgage insurance (LMI) in Australia. Not only does

LMI enable more Australians to buy their own home sooner, and safely, but LMI also enables

borrowers and mortgage lenders alike to participate in Australia’s mortgage market and

financial system.

Genworth made an initial submission to the Inquiry on 4 October 2017 and in this submission

seeks to respond to each of the individual recommendations, responses and requests for

information in relation to LMI contained in your draft Report.

Where Commissioners are interested in further information that we can provide on Genworth

or the LMI industry more generally, we would be pleased to do. If so, please contact Alexander

Drake, Head of Government and Industry Affairs

Yours sincerely,

Georgette Nicholas

Chief Executive Officer and Managing Director

Genworth Mortgage Insurance Australia Limited

Genworth Financial Mortgage Insurance Pty Limited

Genworth’s second response to the Inquiry into Competition in the Australian Financial System

Contents

Contents .......................................................................................................................................... 2

Executive summary ........................................................................................................................ 3

Response to the Draft Report into Competition in the Australian Financial System ................. 5

Draft Finding II.1 – State of competition in the financial system ................................................. 5

Genworth response ................................................................................................................... 5

Draft recommendation 8.5 - Lenders Mortgage Insurance refund ............................................ 10

Genworth response ................................................................................................................. 10

Draft Finding 8.3 – If you have a high loan-to-value ratio, you are probably paying for it twice

over ......................................................................................................................................... 11

Information Request 8.3 - Are changes needed to Lenders Mortgage Insurance? ................... 11

Genworth response ................................................................................................................. 11

Draft Finding 11.1 - Market power in general insurance provision ............................................ 13

Genworth response ................................................................................................................. 13

Genworth Financial Mortgage Insurance Pty Limited

Genworth’s second response to the Inquiry into Competition in the Australian Financial System

Executive summary

Although Commissioners are clearly well-informed about the nature of the LMI industry in Australia,

and how it interacts with borrowers and lenders alike, it is worth briefly reiterating the role and

importance of LMI to the Australian housing market, and wider financial system.

With $384 billion of new loans originated in 2017 and over one-fifth of all new mortgage loans at

80% loan to value ratio (LVR) and above

, LMI plays an important role in making it easier for more

Australians to realise the dream of home ownership. Genworth remains a market leader and we

are proud of our contribution to the great Australian dream of home ownership.

Notable features of LMI in Australia include:

• LMI is one of many types of risk protection that can be taken by a lender to protect it

against financial loss resulting from borrower default;

• Of the 8.4 million residential homes in Australia at June 2017, 2.9 million are mortgaged

and 2.6 million are rented;

• LMI providers have around 1.6 million policies in force on residences (including 1.2 million

on owner occupied loans);

• LMI covers around 40% of Australian households with owner occupier finance; and

• Half of the 300,000 LMI policies issued in the 18 months to June 2017 relate to loans

provided to young homebuyers (aged 35 or under).

Unlike our earlier submission made in October 2017, our response to the Draft Report is organised

around specific requests for information, recommendations or observations made by

Commissioners.

The key items that Genworth seeks to respond to in this submission are:

• Draft Finding II.1 – State of competition in the financial system (pages 32 and 103 of

the Draft Report);

• Draft recommendation 8.5 – Lenders Mortgage Insurance refund (pages 38 and 245 of

the Draft Report);

• Information Request 8.3 – Are changes needed to Lenders Mortgage Insurance?

(pages 38 and 247 of the Draft Report);

• Draft Finding 8.3 – If you have a high loan-to-value ratio, you are probably paying for

it twice over (page 246 of the Draft Report); and

• Draft Finding 11.1 – Market power in general insurance provision (pages 42 and 327 of

the Draft Report).

APRA, 13 March 2018, Quarterly Authorised Deposit-Taking Property Exposures, page 6. Available at:

http://www.apra.gov.au/adi/Publications/Documents/QPEX_December_2017.pdf

Genworth Financial Mortgage Insurance Pty Limited

Genworth’s second response to the Inquiry into Competition in the Australian Financial System

Additionally, Genworth notes the favourable remarks in the Draft Report about the efforts of LMIs

to promote the fact sheet on LMI

and is willing to work with other stakeholders to continue this

educational process.

In addition to the responses to the matters above, if there is more information that Commissioners

would be interested in, Genworth would be pleased to assist further.

Draft Report, page 247. Available here: http://www.pc.gov.au/inquiries/current/financial-system/draft/financial-system-draft.pdf

Genworth Financial Mortgage Insurance Pty Limited

Genworth’s second response to the Inquiry into Competition in the Australian Financial System

Response to the Draft Report into

Competition in the Australian Financial

System

Draft Finding II.1 – State of competition in the financial system

(Pages 32 and 103 of the Draft Report)

Australia’s banking sector is a strong oligopoly with a long tail of smaller providers. The general

insurance sector similarly has a small number of very large providers and a long tail of smaller

providers.

Prudential regulation substantially limits the scope for traditional price competition in banking and,

to a degree, in insurance. The Reserve Bank of Australia setting of cash rates offers an opportunity

for coordinated pricing in banking that is unique to this industry.

Competition on product features and service is less constrained, and thus more evident. But the

large number of marginally different products appears more reflective of a capacity for price

discrimination than of competition.

• Although at less than desirable levels, there is evidence of more competition (albeit on

product features rather than price) in the markets for home loans, consumer credit cards,

home insurance, wealth management and financial advice.

• There is evidence of less competition in the markets for small business credit, lenders

mortgage insurance, add-on insurance and pet insurance. [our emphasis]

Genworth response

In the Australian LMI market, there are currently two active independent LMI providers - Genworth

and QBE (formerly PMI). At the present time, it is estimated that between the two companies, they

hold approximately 64% of total LMI market share.

This market concentration compares with the

top four lenders in Australia representing approximately 72% of mortgage originations in 2017. The

remaining 36% of the LMI market is held by the captive LMI providers – Westpac LMI and ANZ

LMI.

At different times over the last 20 years, there have also been other independent LMI providers

and captives that have competed in the Australian market. The following LMI providers are either in

run-off or have ended operations:

• MGIC (US mortgage insurer);

• Vero LMI;

• Mortgage Risk Management Pty Ltd;

• Permanent LMI Pty Limited (PMI Group and Heritage Building Society);

UBS research note – “QBE Insurance Group”, 19 March 2018.

Genworth Financial Mortgage Insurance Pty Limited

Genworth’s second response to the Inquiry into Competition in the Australian Financial System

• Sunstate Lenders Mortgage Insurance Pty Ltd; and

• Western Lenders Mortgage Insurance Company Limited.

It is understandable for Commissioners to look at the various levels of market share held by

independent LMI providers when considering whether competitive pressures are strong enough in

the LMI market to result in outcomes that benefit consumers. However, those figures themselves

are insufficient to fully appreciate the competitive nature of the LMI market in Australia.

First, although a mortgage lender might sign a contract with an LMI provider so that that provider

provides its policies exclusively to that lender

, there is no obligation by the lender to use those

products to cover every single HLVR loan. When a lender invites tenders from interested LMI

providers, the onus is on LMI providers to offer a product and value proposition that is compelling,

so that a lender will want to insure as much of their HLVR lending book as possible with that LMI

provider.

The effect of this on the market is to make their product as competitive against other LMI providers

as possible. After all, there are alternate structures available to lenders, should they wish to use

them other than traditional LMI, and involve a fee being charged to the borrower equivalent to an

LMI premium, such as the Commonwealth Bank’s Low Deposit Premium

, where risk is retained by

bank with some catastrophic risk transferred to reinsurers.

Second, the contracts that the LMI providers sign with lenders to provide LMI products to lenders

can be to cover the loans in part of a lender’s HLVR book, or in some cases, to provide LMI

exclusively to that lender. An LMI provider entering into a contract with a new lender, whether for

part or the whole of its book, can have a considerable effect on the LMI market.

The possibility of gaining or losing such relationships puts significant disciplinary pressure on LMI

providers to keep their product offering as attractive and competitive as possible, as, in extremis, it

can mean that a major revenue source is lost immediately to the LMI. The tendering process and

the nature of LMI contracts with individual lenders have a significant effect on keeping the LMI

market competitively priced throughout the life of a contract with a lender.

Finally, LMI providers that are registered and based in Australia are obliged to adhere to the rules

established by the Australian Prudential Regulation Authority (APRA)

. However, lenders may also

choose to reinsure their risk via a reinsurer based overseas, that is not obliged to follow

requirements made by APRA of local LMI providers

. In effect, this means that locally based LMI

providers are constantly positioning their product offering to ensure they remain competitive with

numerous potential offshore reinsurers that are not obliged to follow the same APRA requirements

and could potentially enter the Australian market at any time. This is not true compared to other

lines of business in general insurance, such as motor insurance.

Although there are presently only two Australian-based LMI providers competing for business of

insuring HLVR loans written by ADIs, there are multiple significant competitive pressures on the

LMI industry and market, namely:

See as an example http://investor.genworth.com.au/DownloadFile.axd?file=/Report/ComNews/20161103/01798325.pdf

https://www.commbank.com.au/personal/home-loans/low-deposit-premium.html

More information is available here: http://apra.gov.au/GI/Pages/general-insurance-authorisation-guidelines.aspx

One such example arose from the situation outlined here:

http://investor.genworth.com.au/DownloadFile.axd?file=/Report/ComNews/20150217/01599689.pdf

Genworth Financial Mortgage Insurance Pty Limited

Genworth’s second response to the Inquiry into Competition in the Australian Financial System

• The lack of any requirement by ADIs to use LMI, even when a lender uses an LMI provider

exclusively (subject to the contract signed);

• The risk that an LMI provider might lose a major customer keeps LMI providers competitive

and conscious of their need to offer a compelling value proposition; and

• The ability of lenders to reinsure as much of their book as they may wish to, with various

insurers or reinsurers based offshore, and not operating under APRA regulations or

expectations.

These all combine to ensure that the LMI market in Australia remains competitive, ensuring that

lenders and their customers get the best, most reasonably priced, cover for HLVR mortgage

lending.

From a global perspective, the following table gives some insight into how mortgage insurance

markets operate elsewhere:

Jurisdiction

Mortgage insurance or equivalent

program or providers

Known mortgage insurers

Australia

Lenders mortgage insurance

• Genworth

• QBE LMI

• Westpac LMI

• ANZ LMI

Canada

Canada Mortgage and Housing

Corporation (CMHC)

Private mortgage insurance

• CMHC (Crown Corporation with

100% government catastrophic

guarantee)

• Genworth (90% Government

catastrophic guarantee)

• Canada Guaranty Mortgage

Insurance (90% Government

catastrophic guarantee)

China

Mortgage loan guarantees by guarantee

company (抵押贷款担保)

• eg Beijing Housing Guaranty

(Local Government owned)

• Shanghai Housing Guaranty Co

(Local Government owned)

France

La garantie de prêt immobilier de Crédit

Logement

• La garantie de prêt immobilier de

Crédit Logement (bank owned

mutual guarantee company)

• AmTrust

Germany

Required of building societies

• AmTrust

Hong Kong

SAR

Mortgage Insurance by HKMC (按揭保險

計劃)

Private mortgage insurance

• Hong Kong Mortgage Corporation

(Government owned)

• QBE

• Arch

India

Credit risk guarantee fund scheme for low

income housing

Mortgage guarantee companies

• India Mortgage Guarantee

Corporation Private Limited (Joint

venture between National

Housing Bank of India (Reserve

Bank of India owned), World

Bank, Asia Development Bank

and Genworth)

Genworth Financial Mortgage Insurance Pty Limited

Genworth’s second response to the Inquiry into Competition in the Australian Financial System

• Credit Risk Guarantee Fund

Scheme For Low Income Housing

(National Housing Bank of India)

Indonesia

Credit insurance by Askrindo (Asuransi

Kredit)

• Askrindo (State owned Bank)

Italy

Fondo di garanzia per la prima casa

(Fondo prima casa)

Credito Fondiaro

• AmTrust

Japan

Bank-owned “credit guarantee”

companies

Japan Housing Finance Agency

• Bank-owned captives

Korea

Mortgage credit insurance (for <70LTV)

[모기지 신용 보험]

Mortgage insurance (for 71~85LTV) [모기

지 보험]

• SGIC (Government owned)

• Genworth and AIG formerly there

Mexico

Sociedad Hipotecaria Federal (SHF)

Private mortgage insurance

• SHF (Government owned)

• Genworth

Netherlands

de Nationale Hypotheek Garantie

• Government Owned Mortgage

Guarantee Company

Russia

The Agency for Housing Mortgage

Lending

• Central Bank owned Mortgage

insurance reinsurance company

(in runoff)

• Over 20 general insurers wrote

AHML backed mortgage

insurance

Saudi

Arabia

Real Estate Finance Law

Saudi Vision 2030

• Government owned mortgage

guarantee fund for first time

homebuyers

United

Kingdom

“Help to Buy” mortgage guarantee

Private mortgage insurance

• AmTrust

• “Help to Buy” (Government

owned – in run off)

United

States

Federal Housing Authority (FHA)

mortgage insurance

Veteran Affairs (VA) guaranty

Department of Agriculture (USDA)

guaranty

Private mortgage insurance

• Federal Housing Authority (FHA)

mortgage insurance (Government

program)

• Veteran Affairs (VA) guaranty

(Government program)

• Department of Agriculture (USDA)

guaranty (Government program)

• Arch Mortgage Insurance

• Genworth

• MGIC

• Radian

• Essent

• NMI

Genworth Financial Mortgage Insurance Pty Limited

Genworth’s second response to the Inquiry into Competition in the Australian Financial System

It is worth noting that the only country with more than three independent LMI providers is the

United States (US) with nine (three of which are Government programmes).

Continuing the international comparisons, from a global perspective, Australian LMI pricing is

significantly lower than some other jurisdictions. For example, Canadian premium rates are

between 33-175% higher (varies by LVR) for the same full cover product. In the US there are both

monthly premiums and single up-front premium borrower paid options, although please note that

LMI coverage in the US is lower than in Australia (top 12-30% vs full cover). When comparing their

single premium rates to Australia, rates are estimated to be 20-60% higher in the US (varies by

LVR) with lower coverage. This suggests that although Australian market participants are broadly

in line with global norms, there is significantly better value in Australian LMI premium pricing than

that which may be found in other jurisdictions.

Source: Genworth research (2018).

Genworth Financial Mortgage Insurance Pty Limited

Genworth’s second response to the Inquiry into Competition in the Australian Financial System

Draft recommendation 8.5 - Lenders Mortgage Insurance refund

(Pages 38 and 245 of the Draft Report)

The Australian Government should require all lenders to offer home loan customers refunds for the

cost of lenders mortgage insurance when customers choose to refinance or pay out their loan. The

refund schedule for the remaining life of the loan should be set and made available to the borrower

at the time the policy is started.

Genworth response

The Draft Report

has already recognised that LMI premiums can be partly refunded if a home loan

is terminated very early on in the life of the loan. As things stand, if a borrower wants to seek a

partial refund on their LMI premium, they must have already paid out the loan entirely within a year

or two of settling the property. In addition, the borrower should have a clear record on avoiding late

payments. These requirements will vary from lender to lender, and borrowers should ask their

lenders what their own requirements are.

While expanding the scope for refunds may have some high-level appeal as a flexible initiative that

could benefit some borrowers, it overlooks the fact that LMI premiums are set in the context of

capital requirements for lenders and effectively represent “sunk costs” upfront for such items as

capital, expenses and losses which feature more extensively in the earlier years of a policy,

reducing the potential value of extending refunds as a mechanism over the policy period. This

makes it likely that a refundable LMI product would not see the significant downward pressure on

LMI premiums that some might wish for but quite the reverse with prices potentially significantly

higher depending on the level and timing of refunds.

The other major issue to consider is profitability – the need to realise an adequate return by both

the lender and the LMI after taking into account those regulatory requirements. So, expanding the

scope of potential refunds is unlikely to put downward pressure on LMI premiums, despite that the

fact that the LMI market has multiple competitive pressures on it (see responses to Draft Response

II.1 above). Premiums are at current levels because this reflects the cost of the risk and capital

early in the life of a loan, not later on.

Finally, a potential danger that could arise from broadening the scope of refunds is that, where the

refunds exceed the surrender value of the premium, LMI providers would be forced to reassess the

pricing of the product, meaning this would result in higher premiums.

Productivity Commission Draft Report, into Competition in the Australian financial system, 7 February 2018, page 244.

Genworth Financial Mortgage Insurance Pty Limited

Genworth’s second response to the Inquiry into Competition in the Australian Financial System

Draft Finding 8.3 – If you have a high loan-to-value ratio, you are probably paying for

it twice over

(Page 246 of the Draft Report);

Home loan consumers with a loan to value ratio in excess of 80% are often required to compensate

lenders twice for this risk: by bearing the cost of lenders mortgage insurance, and also by paying a

higher interest rate on their home loan, even after other loan and borrower characteristics have been

accounted for.

and

Information Request 8.3 - Are changes needed to Lenders Mortgage Insurance?

(Pages 38 and 247 of the Draft Report)

Are there any circumstances in which it is reasonable for a home loan consumer to be paying both

lenders mortgage insurance and a higher interest rate? If not, what changes could feasibly be

implemented?

Genworth response

It is difficult for LMIs to respond to questions or comments about interest rates being set by

lenders. They are commercial decisions made by lenders and are beyond the scope of LMI

providers. Questions about interest rates settings are best directed to lenders themselves. LMI

providers set premiums for individual loans made by lenders, based on the data that they have

available to assess losses and expenses as well as holding the regulatory capital required.

However, it should be acknowledged that lenders still retain a capital requirement and some

residual operational risk. The way that lenders choose to price risk to their customers is up to

them, but LMIs are willing to work with lenders to entertain alternatives, within the constraints

imposed by the incidence of risk and the regulatory capital system.

Moreover, the Draft Report suggests that where the average interest rate for all borrowers was 5%,

the average interest rate for borrowers would be approximately 5.003%.

Although the Draft

Report acknowledges this difference is “small”, it should be pointed out that the 3-basis point

difference represents $9 pa on the average $300,000 LMI-insured loan. This indicates to us that

lenders do not use the borrower interest rate as a risk-pricing tool, and hence there is no

appreciable double-charging of customers.

Finally, it is worth noting that if LMI were no longer offered it could result in:

• Reduced access to credit/home ownership, particularly for low income, low equity or higher-

risk borrowers (often first home buyers) who will have difficulty obtaining a home loan. This

is particularly relevant to borrowers in regional areas where smaller lenders will not provide

HLVR loans without LMI

• Fewer home loans being approved, or approval delayed unless (and until) the borrower can

save for a 20% deposit.

Draft Report, page 246.

Genworth Financial Mortgage Insurance Pty Limited

Genworth’s second response to the Inquiry into Competition in the Australian Financial System

• Increased volatility from housing market and economic downturns as LMI providers are

APRA regulated and hold significant capital in Australia that provides an additional

independent layer of regulatory capital that supports financial stability;

• Borrowers with low deposits being forced to use low deposit premium products (such as

that used by CBA in some cases) and pay higher interest rates than rates payable on

comparable loans with LMI; and

• Reduced ability for lenders to transfer risk in respect of catastrophic loss – LMI providers

support the credit quality of the Australian banking system and discourage imprudent

lending and act as an early warning system to lenders and the market.

Genworth Financial Mortgage Insurance Pty Limited

Genworth’s second response to the Inquiry into Competition in the Australian Financial System

Draft Finding 11.1 - Market power in general insurance provision

(Pages 42 and 327 of the Draft Report)

Because many general insurers provide insurance under multiple brands, this creates the illusion

of more competition than actually exists in the general insurance market.

In every general insurance market considered — home insurance, domestic motor insurance,

travel insurance, lenders mortgage insurance and reinsurance — the largest four firms (which are

not always the same four) account for more than 70% of the relevant market.

The domestic motor insurance, travel insurance, lenders mortgage insurance and reinsurance

markets are highly concentrated. While the domestic home insurance market is less concentrated,

the two largest firms account for more than half the market.

Genworth response

See our earlier response in relation to the “State of Competition in the Financial System”, noting

that there currently are 4 LMI providers in Australia which, relative to global markets is a

reasonable number of product providers. We have also noted that there are significant barriers to

entry for LMI providers, notably the amount of regulatory capital required to be held by LMI

providers by the Australian prudential regulator to conduct an LMI business; the relatively low

return on equity and the fact that the use of LMI is not mandatory. We believe, given these barriers

to entry that there is a healthy level of competition and share of market power within the LMI

industry. We also point out to the Commission that the LMI product (being insurance taken out by

the lender not the borrower) is in no way comparable or analogous in any way to the consumer

market for motor vehicle or consumer credit add-on or pet insurance products.