A hard landing for China’s economy would spark sharp losses for Australia’s lenders’ mortgage insurers (LMIs), Standard & Poor’s (S&P) warns.

A severe slowdown in the regional powerhouse is unlikely, with only a 5% probability, but if it happens there will be “significant repercussions” for Australia, according to the ratings agency.

House prices could fall 25% and unemployment could double to 10%, with the combined effect triggering “substantial increases in claims frequency and severity for the mortgage insurance industry”.

“We therefore believe Australian LMIs could be downgraded to the BBB category from AA- in a hard downside scenario,” S&P said.

S&P Director Financial Services Michael Vine says loss ratios could climb to 200%.

The highest loss ratio in the past 30 years was 160%, during a property market downturn in Queensland in 1987.

“We are looking at a scenario in excess of that and maintaining it for four years, which is quite onerous,” Mr Vine told insuranceNEWS.com.au.

However, there is a sufficient buffer to limit the damage. “Even in that scenario, while the industry will suffer, it has the capital, reserves and reinsurance support to make the transition. It is not likely to go below a BBB rating.”