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N.Y. Regulators Deepen Force-Placed Insurance Investigation

PropertyCasualty360.comApr 5, 2012

By Mark E. Ruquet

New York state regulators are calling on insurers to justify the rates they change for force-placed insurance coverage and say there is evidence of conflict of interest between bankers and insurers.

The Department of Financial Services, which has jurisdiction over both the insurance and banking industry, says it is requiring insurers that deal in the mortgage product to provide detailed information covering rates and loss ratio calculations that justify what they are charging customers.

The department says it plans to hold hearings in May “to review whether rates for force-placed insurance are excessive and to examine the relationships between and payments to and from insures, banks, mortgage servicers and insurance agents and brokers.

“It appears that force-placed insurers charge very high premium, but pay out only a very small percentage of those premiums on claims—as little as 20 cents on the dollar,” says Superintendent of Financial Services Benjamin M. Lawsky in a statement. “In addition, questionable payments are made to various players in the force-placed business, further increasing the profits to insurers and banks.”

He says insurers are to give a “complete breakdown” of how much they collect and where that premium is going. In addition, he says insurers need to show that the premiums are “appropriate.”

The insurers that are being required to provide information are:

• Balboa Insurance Co.

• QBE Insurance Corp.

• QBE Financial Institution Risk Services Inc.

• American Security Insurance Co. (Assurant).

• American Bankers Insurance Co. of Florida (Assurant).

• Meritplan Insurance Co.

• American Modern Home Insurance Co.

• Empire Fire and Marine Insurance Co.

• Fidelity and Deposit Co. of Maryland

The department says there is also evidence that banks could be profiting from a cozy relationship with the carriers by reinsuring the forced-place products and profiting from the set-up, seeing as much as 15 percent or more of the premium going to them. This reinsurance set-up, the department says, is presenting a conflict of interest between banks and carriers.

The department says that early investigations of the program show questionable actuarial conclusions. Based on its investigations “most insurers filed a loss ratio of 55 percent.” However, at least one unnamed major insurer averaged a loss ratio of 22 over the last six years and another a loss ratio of 20.

Force-placed homeowners insurance is coverage that is taken out by a bank or mortgage company when a homeowner fails to maintain their own coverage.

The department says the insurance is typically more expensive than traditional homeowners insurance.

“There appear to be a number of very significant problems with force-placed homeowners insurance,” says Lawsky. “The price is often extremely high—as much as ten times the normal rate for homeowners insurance.”

Those high-rates are causing homeowners to default on their mortgages and enter foreclosure, which can also adversely affecting the securitization market for mortgage backed securities.

He also notes that some homeowners have the policies forced on them even though they have their own insurance in place.

“At the hearings, we will explore whether banks are using force-placed insurance to increase their profits at the expense of homeowners and investors,” says Lawsky. 


Back to April 2012 Archive

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