The Insurance Council of Australia (ICA) has rejected suggestions lenders’ mortgage insurance (LMI) is unnecessary and could be replaced with increased interest rates on loans that require the cover.

It says overseas experience suggests costs could be higher under the interest rate approach, and borrowers with less than a 20% deposit would find it harder to obtain home loans without LMI.

“Affordability and accessibility to home ownership has and continues to be a key focus of Australian governments,” ICA says in a submission to a Productivity Commission’s draft report on financial system competition. “This is the key purpose and benefit of LMI, and LMI providers specialise in managing the higher risks presented by that cohort of borrower.”

Consumer group Choice’s submission says LMI “masquerades” as a consumer-facing product while protecting only the lender. It wants the cover abolished.

The issue was discussed at public hearings in Sydney and Melbourne.

A Genworth submission says Genworth and QBE have about 64% of the LMI market, while Westpac LMI and ANZ LMI are captive providers. It notes Australian LMI pricing is “significantly lower” than in some other jurisdictions.

ICA says there is a “robust” dynamic between QBE and Genworth and disputes a draft report observation that the competition incentive is limited as costs are passed on to consumers.

“The nature of the tender processes that these LMI providers engage in is highly competitive and ensures the best possible price is offered to the lender and the least expensive price is passed through to the borrower,” it says.

“In addition, there are competitive pressures on the domestic LMI providers due to the role of offshore reinsurers.”