Saturday, December 28, 2013

Insurance, mortgages & black boxes

Recently I posted on Cairns mortgage arrears relative to the rest of Queensland. Today, during a leisurely perusal of the Courier-Mail at my local Esplanade RSL, I stumbled upon a report of related data: Queensland sucks up claims on mortgage insurance
QUEENSLAND has an extraordinarily large amount of claims on mortgage insurance.
The insurance pattern became apparent in figures collated by finance industry watchdog, the Australian Prudential Regulation Authority.
Lenders mortgage insurance is protection taken out to protect institutions, such as banks, in case a borrower defaults on a loan. That loan has property as collateral.
Lenders typically require such insurance they lend more than 80 per cent of the property's value. That is because it implies a greater level of risk in the loan.
There has been a bleedingly-high level of claims in Queensland, following some real estate values slumping, and some people losing jobs.
The loss ratio for mortgage classes of insurance business was 93 per cent in fiscal 2013, according to APRA's figures. "This high loss ratio was due to above average claims for loans on properties in some parts of the state," APRA said.

This comes from the APRA statistics which were actually released a month ago (must have been saved up for a slow news period). There has also been an update for the September quarter which is also unfavourable to Queensland.

To put this in perspective in Fiscal 2013 Queensland accounted for 25% of gross written premiums for mortgage insurance in Australia while accounting for 53% of gross incurred claims. I thought maybe there must have been some anomaly or quirk ovrlooked here but can't immediately see what? Although NSW/ACT also accounts somehow for 61% of all travel insurance claims in Australia?

A few weeks ago watching Alan Kohler's Inside Business on OurABC the now veteran fund manager Peter Morgan shook his head when asked for an opinion on the insurance industry as something of a mysterious black box. The nuances of insurance are among the most financially difficult to grasp which is clear to anyone who has painfully watched our politicians attempt to grasp FNQ strata property insurance over the last few years.

So the most interesting recent release also stumbled upon when browsing at APRA was this released the week before Christmas, which should be essential reading for anyone with an interest in FNQ property insurance  Letter to industry: catastrophe risk management
The ultimate responsibility for ensuring prudent and effective management of insurance concentration risk rests with the board of the insurer. APRA expects the board to oversee the insurer’s gross exposure to insurance concentration risk, the effectiveness of the proposed reinsurance arrangements in protecting the insurer against insurance concentrations, and the residual risk retained by the insurer.
Catastrophe concentration risks have been a critical component of our tropical property insurance crisis. Discussion around models, analysis and scenario testing is particularly interesting. There was also on observation on apparent problems with catastrophe risk modelling last year at Queensland Economy Watch: Gov't Actuary finds insurers struggling to understand catastrophe risk.

When we talk about limited supply by insurers into our market we are really talking about supply of capital, which is where APRA comes in. There have been reports as the year has progressed of easier capital conditions in insurance markets. It's disappointing that there hasn't been able to be deeper involvement by APRA into understanding the FNQ insurance issue in recent years.

I recently listened to an interview by our local radio shock jock of Warren Entsch, and assistant treasurer Arthur Sinodinos on those controversial insurance issues in FNQ, coincidentally at almost exactly the same time as the APRA letter. Now while insurance maybe complex to get one's head around it seems to me that Arthur, Warren, and APRA may not have all be singing in perfect harmony here? Perhaps I will have to go back and review my recording of the conversation.

Therein lies much content for future posts related to the currently proposed "plan" to address insurance in the tropics.

Update: Insurers may be at the centre of next big crisis

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