Not at all. These businesses don't exist for the reason you suggest they exist.
They are simply an outworking of the fact that regulators require insurance companies and banks to hold different amounts of capital for identical risk profiles, simply because one is a bank and one is an insurance company.
For years banks were allowed to fully own their LMI insurer (called a 'captive' insurer). Loans were written by the bank, the 'insured risk' transferred to a wholly owned subsidiary (the LMI captive) and then the capital requirements for the group became substantially less. The risk for the group wasn't less, just reapportioned from one subsidiary company called the 'Retail Bank' to another subsidiary company called the 'LMI Captive', but it allowed them to hold significantly less capital.
I know the LMI insurers aren't totally stupid. They understand that the banks are simply 'renting' their statutory capital at a cheaper rate than they could get by holding capital themselves. But they're also very cyclical businesses, making a lot of money across the majority of the cycle before facing the inevitable in a downturn. There's a very good reason why there's a lot less LMI insurers now than there was 30 years ago and it comes down to a question of survivorship.
