2014-01-16
National Audit Office: doubts about business continuity of the company Housing Mortgage Insurance
The establishment of the joint stock company Housing Mortgage Insurance (UAB Būsto paskolu draudimas) by a Government resolution paved the way for the insurance of mortgages for housing in Lithuania, which was started in the year 2000. Housing mortgage insurance has allowed people with regular income who, however, are not able to accumulate or do not have the required initial contribution to the bank to buy a housing with a small or without any initial contribution. Given the fact that over the past five years the company has been incurring only losses and the state has been allocating funds for the fulfilment of the obligations undertaken by the company, the National Audit Office conducted an audit to assess the effectiveness of the performance of this insurance company.
Business continuity of Housing Mortgage Insurance, as a for-profit insurance undertaking, is subject to serious doubts, because the company has not been insuring mortgages, i.e. has not been conducting the business for which it was set up, the recovery carried out by the company has been failing to guarantee adequate cash flow, and the company is not able to meet its obligations without additional injections of public funds,” said Auditor General Giedrė Švedienė summing up the audit results.
The Articles of Association of the company state that the purpose of its business is to provide mortgage insurance and to seek maximum profit in this activity. Due to the economic crisis, the decline in bank lending, and the loss of jobs, the number of mortgage insurance contracts rapidly decreased, no contracts on the insurance of credits for the modernisation of multi-apartment houses were concluded over the period 2012-2013 and no contracts on the insurance of residential property credits were made in 2013.
Given the existing situation, the company’s business has been transformed into that of investigation of insured events and recovery, however, it does not ensure sufficient cash flow to fulfil its obligations. The share of the amount paid to banks under insurance schemes which was recovered by the company by the middle of 2013 accounts for 14 per cent of the total insurance burden, i.e. LTL 33.3 million were recovered out of the total amount of LTL 240.8 million paid to banks. Payments to banks for insured events and a very low amount recovered from borrowers had a major impact on the company's losses. The operating result of the company since 2009 was loss in the amount of almost LTL 170 million.
In addition, since 2011 the company has not met the requirement concerning the coverage of insurance technical provisions with appropriate assets, which is mandatory for an insurance undertaking. Due to the failure to fulfil this requirement and to provide a Board’s decision on prospects of the company’s business to the Bank of Lithuania, the insurance business licence of the company was suspended in November 2013.
Despite the said problems, public funds have been further invested to the company to increase its share capital (LTL 157 million) under the Board’s decisions and credits have been issued, however, the company does not consider whether its current form and size would ensure economically sound performance over the coming decades. Therefore, given the fact that the company Housing Mortgage Insurance administers 35,000 valid insurance contracts, that the company may not conclude new insurance contracts, and that the last contract runs out in 2047, the National Audit Office urges the Ministry of Finance to submit proposals to the Government on the viability of the business of the company Housing Mortgage Insurance and/or transformation of the company’s business model.