Regulators fear loan insurance may be at risk

Tim Wallace
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TOUGHER rules are needed to make sure mortgage insurers are up to the job of protecting banks, the Basel Committee on Banking Supervision said yesterday, calling for closer supervision of the insurers.

The group called for insurers to build up bigger capital buffers against potential losses as well as extra reserves to keep them safe in economic downturns.

Mortgage insurance is meant to protect lenders by transferring risk to insurers, who can cover them against tail risks.

But in severe downturns, the Basel Committee fears insurers cannot cope as they are set up currently.

“In the worst cases, failure of a mortgage insurer may occur leading to resolution of the insurer, whereby some of the most extreme tail risk may revert to the lender at the very time that the insurance would be most needed, potentially creating systemic risk,” warned the consultation document.

This problem is exacerbated by the highest loan to value mortgages being those most frequently insured, the committee argued.

As well as tougher capital rules, the consultation wants to monitor sales incentives at the insurers.