Banks have been using captive insurers for years. As long as the good people in APRA are happy with the strength (rating) of the captive, which is basically a function of the rating of its reinsurer, they're as "good" as an external insurer.
Personally, I've always had the view that APRA were nuts in this respect.
Self-insurance (i.e. no insurance) is a different beast altogether and means, in essence, that for a fully verified loan with an LVR of more than 80% the bank needs to hold twice as much capital as an insured loan and, therefore, make twice as much profit to deliver the same ROE.
Basell II is another topic altogether but will ultimately deliver significant capital advantages to the big banks.
thanks mate i wasnt aware of this.
PS great caption at the bottom of your posts, 1873 huh, just proves my point, things move in cycles and mankind never learns (at least when its out of mind)