Mortgage insurance gravy

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From Banking Day:

Mortgage insurers earned a total of A$999 million of premium income in the year to June last year and incurred claims of just $177 million.

The segment is of increasing interest, not just to the banks and other lenders that buy this insurance (in a highly concentrated market) but also to investors, who will soon be asked to buy a stake of up to 40 per cent in Genworth Financial Australia, one of the two largest providers in this category of insurance.

These figures on lenders’ mortgage insurance are included in a report on the direct general insurance market released by the Australian Prudential Regulation Authority yesterday.

No other class of general insurance comes close to the margin that mortgage insurers earn.

Domestic motor vehicle is the biggest class, with $6.6 billion of premiums in 2010/11 and $6 billion of claims incurred.

Home-owners’ insurance generated $5.4 billion of premiums and $4.5 billion of claims.

Fire and industrial special risks’ insurance generated premium income of $3.3 billion and incurred claims of the same amount.

Compulsory third-party motor vehicle insurance generated premiums of $2.7 billion and incurred claims of $2.4 billion.

Those are some huge margins all right. And the lack of competition provides big pricing power. However, a useful analogy for understanding risk in this sector is to compare it with the mortgage business that the banks have grown so aggressively in the past decade and more. It too is the most profitable form of business, with the lowest risk-adjusted capital charges by some distance. And in normal times, such is a gravy train as risk models do not pick up unusual or “black swan events”.

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The question you have ask yourself of course is, are these normal times?