Force-placed insurers operating in New York must lower the premiums they charge, the state's governor and superintendent of financial services announced on Tuesday.
The decree comes a month after New York grilled insurers and mortgage servicers over their handling of force-placed insurance, which banks purchase on the homes of mortgage borrowers who allow their own hazard policies to lapse. While meant to protect mortgage borrowers and investors, critics such as New York's DFS allege the product has turned into a vehicle for price-gouging and kickbacks from insurers to banks.
Insurers in the force-placed market — which is dominated by two companies, QBE Insurance and Assurant — will have until July 6 to resubmit their rates for DFS approval. New York's order comes a few months after a similar mandate by California's insurance commissioner.
"Our hearings suggest a lack of competition, high prices, and low loss ratios, all of which hurt homeowners," New York Financial Services Superintendent Benjamin Lawsky said in a release announcing the demand for new insurance filings. "Based on what we learned at the hearings, it is now appropriate for insurers to propose new rates along with justifications for those new rates."
The Department of Financial Services has been investigating the ties between banks and force-placed insurers for at least six months, and aired many of its preliminary conclusions during its hearings last month. Among its findings were that insurers had paid far less in claims than they forecast — in some cases, less than a quarter of the premiums they took in.
During the hearings, some of the insurers even suggested that some level of rate cut might be in order. John Frobose, president of Assurant Specialty Property, conceded that the company had long earned more from the policies than it expected. "There probably would have been an opportunity before the mortgage crisis to reflect on rates," Frobose said.
An Assurant spokeswoman said that the company intended to meet the DFS request. "As a leader in the industry, we are prepared to revise our lender-placed offerings to reflect mortgage market conditions and meet the needs of New York homeowners, lenders and investors," she wrote.
How far premiums should drop will be a contentious matter, however. During the hearings, DFS staff and consumer advocates suggested that insurers' targeted payouts should be as high as 80%. Insurers argued that such a high rate would make doing business infeasible, especially because they expect to pay higher claims as banks clear through their backlog of foreclosures.
The Department of Financial Services may not simply be content with lower rates, however. During the hearing it also questioned the basis for commissions paid by insurers to the banks that contract for the policies, and captive reinsurance agreements that allow mortgage services such as JPMorgan Chase to share in the profits from force-placed premiums. Critics argue that such arrangements amount to a pay-to-play scheme.