Accused of price-gouging, kickbacks and borrower mistreatment, insurers QBE and Assurant sparred with the New York Financial Services Department in a Thursday hearing on force-placed insurance.
The two companies, whose subsidiaries hold a 90% share of the market, offered a broad defense of the industry and dismissed allegations that they regularly force unnecessary insurance upon borrowers as a "myth."
Force-placed insurance "protects homeowners, lenders, and investors," said Matt Freeman of QBE First, a QBE subsidiary. "Its existence allows banks to extend mortgage credit nationwide."
Force-placed coverage, which is bought by mortgage servicers when homeowners fail to maintain their own policies, has been condemned by consumer advocates as predatory and exorbitantly priced, a mirror image of abusive lending practices that preceded the housing bust.
"The growth in force-placed has been motivated by the foreclosure crisis and by the financial gain that banks stand to make due to payments from insurance companies," testified Alexis Iwanisziw, of the Neighborhood Economic Development Advocacy Project.
Based on the concern that banks are colluding with insurers to charge high prices, New York's Department of Financial Services is considering state rules in that would ban the payment of commissions to mortgage servicers and cap how much profit insurers could extract from the borrower.
"We should consider whether banning these relationships makes sense," said DFS Commissioner Benjamin Lawsky. "The perverse incentives that such financial arrangements may create "would appear to harm both homeowners and investors while enriching the banks and the insurance companies."
New York's Department of Financial Services has been investigating the force-placed industry since last year, making it the first government body with subpoena power to extensively explore the market. Thursday's hearings mark the first public airing of the DFS review, and drew a crowd of insurance industry officials, banking attorneys and consumer advocates to the conference room of a federal office building in New York's financial district.
The DFS's review suggests that force-placed insurance is far bigger — $5.5 billion a year nationally, according to Lawsky — and more lucrative than had previously been recognized. Only around a quarter of the premiums go toward paying claims, according to the DFS, vastly less than in almost every other variety of insurance.
Assurant and QBE struggled with DFS questions suggesting that they have paid unearned commissions to banks and have taken profits vastly in excess of what they'd told the Department of Financial Services to expect. Based on QBE's 2009 New York rate filing, DFS general counsel Daniel Alter accused the company of falsely understating commissions it paid and hiding the profitability of its force-placed program. Alter also drew attention to a "multimillion-dollar, lump-sum payment" that QBE paid to a servicer for reasons that neither of the QBE executives who were present could not explain.
QBE offered little rebuttal, other to assert that the company wouldn't mistreat borrowers to increase its profit.
"That's not what we're all about," said QBE First's Freeman.
DFS staff also grilled Assurant about its prices. The insurer told New York state more than a decade ago that it expected to earn a 5% profit on its force-placed insurance policies. Assurant's actual returns were more than six times that, however.
The president of Assurant subsidiary American Security said the company's intentions were good, but conceded that its premiums might have been too high.
"There probably would have been an opportunity before the mortgage crisis to reflect on rates," said John Frobose, president of Assurant Specialty Property.
Although the flood of defaults following the mortgage bust has been "very good" for Assurant's revenues, Frobose cautioned that the Department of Financial Services should expect that Assurant's profit margins will remain as high. The company expects that it will have to pay more claims as borrowers clear out of foreclosed homes, he said.
"Clearly we recognize the fact that we need to do something [about rates] now. We just don't think that the conditions we see now are indicative of what we're going to see in the future," Frobose said.
While force-placed insurance is a niche insurance industry, the staff of the Department of Financial Services sought to illustrate links between the force-placed insurance industry and broader mortgage woes.
"Is it not the case that the cost of force-placed insurance contributes to homeowners being foreclosed upon?" asked Joy Feigenbaum, one of the DFS staff handing the force-placed investigation.
Borrowers who ended up with force-placed insurance — despite in some cases not needing it — said the product's high premiums had driven them near or into foreclosure.
"I would have lost my home, no two ways about it," said Lana Worrell, a Queens, New York, resident whose annual insurance premiums doubled when a force-placed insurance policy was put on her home.
The housing advocates and borrowers who spoke told Lawsky that such policies are routinely issued without notice, backdated or written for more than a home's replacement value. Some of the borrowers testifying said that the insurers refused to cancel force-placed policies even after they were presented with proof of voluntary coverage.
Representatives of the insurers said any such mistakes were unfortunate and regrettable.
"We have a process that I believe is efficient and effective? Is it perfect? I'm sure there are times when it does not go as intended, but the intent is to work with borrowers," said QBE's Freeman.