Premiums for so-called force-placed insurance have more than tripled since 2004, producing enormous profits for insurers and the banks that take out policies when a homeowner fails to maintain coverage required by the mortgage, according to New York regulators.
In some cases, the premiums are “exponentially higher” than regular homeowners insurance and can push homeowners into foreclosure, Department of Financial Services Superintendent Benjamin Lawsky said last Thursday at the start of public hearings on insurance rates. Such premiums rose from $1.5 billion in 2004 to $5.5 billion in 2010 during the U.S. housing crisis and have probably risen since, he said.
A handful of homeowners told regulators about insurance rates they were forced to pay that were up to three times higher than their original policies, making it harder to keep their homes. Some said they didn’t get notices about the changes until they got higher bills for their escrow accounts. Consumer advocates said similar stories were widespread, and that homeowners also end up with policies that don’t cover their personal injury liability or their house contents.
On a typical homeowner’s policy, at least 63 cents of every dollar pays claims, Lawsky said. But with force-placed policies, he said, the loss ratios “drop precipitously,” often below 25 cents and sometimes as little as 17 or 18 cents on the dollar pays claims, while the rest is mostly profit.
While acknowledging the importance of maintaining coverage, the department set hearings to examine whether to ban related financial incentives between banks and insurers and whether to require a minimum loss ratio like it does with health insurance, with refunds of excess premiums to consumers. The department has authority over both.
“Amidst this boom in premiums and profits, there also appears to be a web of tight relationships between the banks, their subsidiaries and insurers that have the potential to undermine normal market incentives and may contribute to other problematic practices,” Lawsky said.
“In some cases this takes the form of large commissions being paid by insurers to the banks for what appears to be very little work. In other cases, banks have set up reinsurance subsidiaries who take over the risk from the insurance companies.”
He said that for example, JP Morgan Chase pays high premiums to insurer Assurant, which in turn reinsures 75 percent of the risk through JP Morgan’s Vermont-based captive insurance subsidiary.
Executives from Insurers Assurant and QBE, which provide more than 90 percent of the forced-place insurance market in New York, said their rates reflect the risk they must assume for properties, some unoccupied, without underwriting or inspections, in order to ensure coverage never lapses. That protects the equity of lenders, homeowners and investors against hazards like fires or hurricanes, even as they faced a sudden spike in business, they said.
John Frobose, president of Assurant parent American Security Insurance Co., said they believe there are still “significant amounts of unrealized losses” like water damage that they will see when borrowers leave their properties. He said their exposure has grown $5.8 billion the last five years. On the JP Morgan Chase arrangement, he said, Chase’s rates are consistent with what’s available in the market.
Matthew Freeman, mortgage lender services executive with QBE First, said there has been no catastrophic event in New York over the past three years, one reason for the low loss ratio recently, while executives need to look at long-term averages. Loss ratios have been rising since 2010, he said. Most of their exposure is in more populous parts of the state that weren’t severely affected by last year’s late-summer flooding.
Questioned by Executive Deputy Superintendent Joy Feigenbaum, Freeman said his company’s false placement rate is about 10 to 12 percent. Frobose said its error rate is in the mid-teens.