The Consumer Federation of America (CFA), a Washington, D.C.-based consumer advocacy group, today called on New York regulators to become a national leader in overhauling regulation of force-placed insurance (FPI) for homeowners.
New York Financial Services Department is holding a public hearing on force-placed insurance today, May 17, as well as tomorrow, May 18, and next Monday, May 21. They are held from 10:00 am to 5:00 pm and can be watched live online at the department’s website.
In his testimony before the New York Financial Services Department, CFA Insurance Director J. Robert Hunter urged regulators to put an end to what he described as “insider dealing by insurers and lenders” and “the unjustifiably high home insurance rates charged to some consumers.”
FPI policies are placed by banks on borrowers’ property, if borrowers fail to keep hazard insurance in force, according to Hunter.
This usually occurs because they fall behind on paying the policy premium. Because of the recent tough economic and housing situation, many more policies have become force-placed. One of the biggest insurers in New York now has more than 33,000 FPI policies in effect, he noted.
“Lenders usually use forced insurance as an opportunity to collect vast profits by charging outrageously high rates,” said Hunter, a former Texas insurance commissioner and federal insurance administrator.
“Self-dealing and kickbacks are common. Lenders collect commissions through affiliated agents or brokers. They receive below-cost or free services from insurers, such as loan tracking assistance. Or they use an insurance company as a front to direct the coverage — and the profits — to their affiliated reinsurers.”
Hunter told regulators that “reverse competition” is a major problem with the FPI marketplace. He said this phenomenon occurs when insurers compete for lenders’ business by providing financial incentives to the lender, which are then charged to borrowers, increasing the cost of the insurance.
“Reverse competition is a market condition that drives up prices to the consumers, as opposed to normal competition, which usually brings rates down,” Hunter said.
He told regulators that in a review of rate filings in New York, CFA found there is virtually no competition. The major FPI insurance companies, Assurant and QBE, charge the same rates, Hunter noted. He also alleged that while these companies claimed that they would pay out 55 to 60 percent of premiums they received to cover losses, they in fact only paid out 25 to 30 percent.
Hunter: ‘New Yorkers Are Being Charged Far Too Much’
“The exceedingly low payouts for FPI insurance means that New Yorkers are being charged far too much for the coverage,” he said.
Hunter argued that, often, reverse competition abuses fall into the cracks between insurance and banking regulation.
“Just like insurance regulators, state bank regulators have done little to stamp out FPI abuses,” said Hunter. “They often see this as only an insurance issue, which means that it is someone else’s problem. Besides, what could be better for safety and soundness than the huge profits FPI generates?”
By contrast, Hunter said, New York’s Financial Services Department oversees both insurance and banking, which means that the state is well-suited to investigate problems with FPI insurance, which affect both insurance and lending regulation.