The Australian Prudential Regulation Authority should recognise the role lenders’ mortgage insurance (LMI) plays in supporting home loans, the Insurance Council of Australia says.

In a submission to the regulator, CEO Rob Whelan says references to LMI in the draft prudential practice guide should be rewritten in a more positive light.

He says the guide should recognise that lenders are the first line of defence, with LMI the second line, and that lenders should not rely on LMI processes to cover their requirements.

References in the regulator’s draft guide “unnecessarily stress that LMI in itself is insufficient”.

“We suggest the benefits of LMI should not be understated, because they are fundamental in strengthening a number of key aspects of an authorised deposit-taking institution’s risk management, which underpins the risk management principles inherent in the Draft Prudential Practice Guide,” the submission says.

While the draft guide makes clear lenders’ responsibilities in relation to risk assessment, control and monitoring of appetite, it overlooks LMI as a legitimate avenue through which a responsible lender might also address these issues, according to Mr Whelan.