Insurance regulators in New York and California have demanded that banks lower the premiums they charge delinquent homeowners for force-placed hazard insurance. Now the National Association of Insurance Commissioners is taking a closer look as well.
The NAIC, the standard-setting body for state insurance regulators, announced late last week that it intends to hold a hearing on force-placed insurance, also known as lender-placed insurance. The focus of the event, which will take place during the state commissioners' annual meeting next month, appears to whether financial arrangements between banks and insurers are harming consumers-a controversial question about which American Banker has reported on extensively over the past two years.
The concept behind force-placed insurance is that mortgage borrowers are contractually required to maintain insurance coverage on their property to protect the interests of lenders. When homeowners fail to maintain such coverage, mortgage servicers are entitled to buy insurance on their behalf and then bill homeowners for it.
In practice, banks routinely receive commissions or lucrative reinsurance contracts from the insurers that offer force-placed coverage, giving both sides an incentive to keep prices high. Such arrangements amount to a form of collusion between mortgage servicers and insurers that has inflated the cost of force-placed policies to exorbitant levels, consumer advocates and plaintiffs' attorneys allege.
Regulators in New York and California have found that the insurers generally pay out little of their premium income in claims and instead enjoy extremely high profit margins on the premiums charged to borrowers. New York's Department of Financial Services has also raised concerns that the concentration of the force-placed market in the hands of only a couple of insurers has restricted price competition.
The industry's two largest carriers, Assurant Specialty Property and QBE First, control around 90% of the national market. New York investigators stated in a May hearing that insurers had paid far fewer claims than they'd projected. State officials faulted banks for taking commissions and multi-million dollar lump-sum payments from insurers, even though they performed little or no work in exchange.
"The more attention paid to the force-placed insurance issue the better," says Benjamin Lawsky, the Superintendent of New York's Department of Financial Services. "Our hearings made clear there is a need for fundamental reform."
The existence of the NAIC review suggests that other state insurance commissioners may believe the force-placed market needs more oversight, but that view is not unanimous. In fact, the head of the NAIC committee handling the hearing is unconvinced. Rather, the hearings are the result of pressure by consumer advocates, says Michael Chaney, Mississippi's insurance commissioner and chairman of the NAIC's property and casualty insurance committee.
"I think it would be better if we didn't have them," said Chaney. "I don't think they serve any purpose except to give a bully pulpit to people who hate banks and insurance companies."
Chaney says he's seen few force-placed insurance problems in Mississippi. Nevertheless, he insists his committee will take allegations of force-placed wrongdoing seriously at the hearing.
"If I put on my NAIC hat, I would say that we want to be certain that problems are not widespread throughout the United States," he says.
The banking industry has likewise denied allegations that the force-placed industry is fundamentally troubled or over-charging homeowners. A spokeswoman for Assurant Inc. says the company welcomed the NAIC attention.
"As a leader in the industry, Assurant plans to participate in the NAIC's upcoming hearing," said Shawn Kahle, vice president of corporate communications. "We look forward to discussing the facts about the value of our program, the steps we take to protect customers, and the assistance we provide homeowners who would otherwise go unprotected."
Separately, Florida's Office of Insurance Regulation has announced that it would hold a hearing today to review the force-placed insurance rates charged by QBE subsidiaries operating in the state.
The review in Florida — by far the country's largest force-placed insurance market — does not appear to involve concerns about the behavior of banks or insurers. Instead, it appears to be a routine review stemming from QBE's application to consolidate its two main force-placed insurance companies, QBE Specialty Insurance Company and Balboa Insurance Company, into a third subsidiary, Praetorian Insurance.
In announcing the hearing, which will be held today, Florida's Department of Insurance Regulation, a division of its Department of Financial Services, appeared to downplay the possibility that it would follow in New York and California's footsteps. Balboa's rates were already "carefully scrutinized" in 2009 "to ensure the rates in place were actuarially sound," the insurance regulator announced.
"Unlike New York which launched a special investigation, these hearings are just the ordinary course of the department's business," says Jeff Golant, a Florida consumer attorney who has been litigating against force-placed providers. "But this sticks the issue right in front of the Florida DFS's nose."