Assurant (AIZ), the nation's largest force-placed insurer has agreed to New York State's demand that it stop paying bank partners for their business. This is likely more painful for the banks than it is for Assurant.
The insurer's concession to regulators appears likely either to precede similar settlements with rival force-placed insurers or a regulation imposing a similar prohibition statewide. It may also mark a major turn in the multi-year fight over whether banks and insurers have wrongfully colluded to inflate the price of specialty property coverage.
"If Assurant is agreeing to these reforms here, it certainly could do them elsewhere," said Benjamin Lawsky, who oversees both the banking and insurance industries as New York's superintendent of financial services. "Once these reforms are ubiquitous in the market, insurers will compete based on price and product quality, not on payments back to banks."
Banks are required to buy force-placed insurance to protect mortgage investors' in the homes of borrowers who allow their standard policies to lapse. Banks do not pay for the product, however. Instead, they pass on the cost to struggling homeowners and mortgage investors, creating a potential conflict of interest.
Consumer advocates and state insurance officials allege that insurers and banks have colluded to inflate the price of the product and split the premiums. As foreclosures boomed over the last five years, force-placed premiums rose in tandem, turning what was formerly a niche market into a multi-billion-dollar business.
A series of lawsuits and hearings held by New York last year revealed that banks received commissions, eight-figure lump sum payments, and generous reinsurance deals, despite performing little or no work. In some cases, banks collected money through insurance agencies that employed no insurance agents.
Until now, however, both insurers and banks have vehemently defended both the payments and the overall cost of force-placed insurance. At Lawsky's hearings last May, for example, a JPMorgan Chase (JPM) executive argued that a reinsurance agreement that funneled Assurant's force-placed premiums back to the bank was not problematic.
"The price to the customer wouldn't change," argued Chase Insurance Agency executive Robert Segnini, a position backed at the time by Assurant. But with New York pushing to ban payments to servicers, however, Assurant appears to have become either unwilling or unable to defend such payments within the state.
"We continuously review our policies to ensure they are meeting our customers' needs," a JPMorgan Chase spokeswoman said about the Assurant settlement.
Assurant neither admitted nor denied wrongdoing as part of Thursday's settlement. The monetary penalties it faces — a $14 million payment to the state and a partial refund of insurance premiums to New York customers who request it — appears modest.
In contrast, its agreement to abide by future regulations banning payments to banks amounts to "fundamental reform," according to Lawsky.
The terms of Assurant's settlement with New York are contingent upon the same rules being applied to its rivals, the most prominent of which is QBE. (The two companies together control more than 90% of the force-placed market nationwide.) Asked if he was concerned about getting QBE to comply with similar rules, Lawsky replied with a curt "no."
Consumer advocates agreed that New York's change was far more significant than previous demands by state insurance commissioners for lower insurance premium rates.
"The Department really set the standard," says Birny Birnbuam, executive director of the Center for Economic Justice and a longtime critic of the force-placed industry. "It showed that force-placed insurance has been a mechanism for kickbacks to servicers, and it's developed a framework to stop those kickbacks."
Other observers saw the New York agreement as a sea change in the relationship between servicers and the two main insurers, Assurant and QBE.
"Assurant and QBE did a great job of making it easy for the servicers to make money on this," says Marc Tanowitz, a consultant for Pace Harmon who has pitched banks on force-placed market changes. "That gravy train is gone."
The agreement is all the more significant given its timing. It follows an attempt by Fannie Mae, the country's largest guarantor of mortgages, to directly purchase force-placed insurance for its own portfolio from an alternative lineup of insurers. The approach — which was blocked by the FHFA following intense lobbying by both banks and the dominant insurers — would have saved hundreds of millions of dollars by sidelining both groups.
The approach taken by New York will be just as costly for banks, but much easier on insurers. Although it will lower the rates Assurant can charge, the company will recoup some or all of that money in savings on commissions or other payments.
"Assurant stepped out of the way and let the servicers [banks] take the brunt of the harm," Tanowitz says.
The Center for Economic Justice's Birnbaum cast Assurant's move as a concession to reality rather than a betrayal of its servicing partners.
The New York Department of Financial Services "is developing a regulation to include all of these prohibitions," he says. "Why not cooperate with regulators and get ahead of the game?"
There is no guarantee that other states will follow in New York's footsteps. A spokeswoman for Assurant downplayed the significance of the New York deal.
"We see this as an agreement that is unique to New York, and we enter it in that spirit," a spokeswoman for Assurant said.
Insurance regulators in Florida and California did not immediately respond to requests for comment on the New York settlement, but the deal is likely to be a topic of conversation at a meeting of the National Insurance Commissioners next month.
"The conference in April will be a great chance for us to talk with other regulators about what we've done in New York," Lawsky said.