New York officials announced this morning that a New York State Department of Financial Services (DFS) investigation produced an additional settlement with a major “force-placed” or “lender-placed” insurer, QBE.
The settlement with QBE, the nation’s second-largest force-placed insurer, follows an earlier similar deal with the country’s biggest force-placed insurer Assurant Inc. on March 21.
The QBE settlement includes restitution for homeowners who were impacted, a $10 million penalty paid to the State of New York, and a set of wide-ranging reforms — first agreed to last month by Assurant in a DFS settlement.
New York officials said these reforms would save homeowners, taxpayers, and investors millions of dollars going forward through lower rates.
Officials announced that — together with DFS’s previous settlement with Assurant — the agreement with QBE means that companies responsible for at least 90 percent of the force-placed insurance market in New York have now signed onto the N.Y. Gov. Andrew Cuomo administration’s reform effort.
QBE has been the second-largest force-placed insurer both nationally and in New York since it acquired Balboa Insurance Company’s force-placed insurance business in 2011, officials said.
Gov. Cuomo said, “The kickbacks and payoffs in the force-placed insurance industry used to be a dirty little secret that pushed far too many families off the foreclosure cliff, but my administration’s investigation is helping put a stop to those abuses.”
“The nation-leading reforms that we’re putting in place will mean lower home insurance costs and better protections for many working New Yorkers,” Gov. Cuomo said.
New York State’s Financial Service Superintendent Benjamin Lawsky added that the “momentum behind New York’s force-placed insurance reforms is continuing to build.”
“We urge other regulators to pick up the ball and run with it by implementing New York’s reforms nationwide — so that all homeowners, regardless of where they live, are better protected from abuse,” Superintendent Lawsky said. Earlier this month, Lawsky sent a letter to other state insurance commissioners urging them to implement New York’s force-placed insurance reforms nationwide.
New York regulators released the following investigative findings concerning QBE:
- In October 2011, DFS launched an investigation into the force-placed insurance industry, including QBE and its subsidiaries. Force-placed insurance is insurance taken out by a bank, lender, or mortgage servicer when a borrower does not maintain the insurance required by the terms of the mortgage.
- The investigation revealed that the premiums charged to homeowners for force-placed insurance can be two to 10 times higher than premiums for voluntary insurance — despite the fact that force-placed insurance provides less protection for homeowners than voluntary insurance.
- Even though banks and servicers are the ones who choose which force-placed insurance policy to purchase, the high premiums are ultimately charged to homeowners, and, in the event of foreclosure, the costs are passed onto investors. And when the mortgage is owned or backed by a government-sponsored enterprise, such as Fannie Mae or Freddie Mac, those costs are borne by taxpayers.
- Regulators said QBE competed for business from the banks and mortgage servicers through what is known as “reverse competition.” That is, rather than competing by offering lower prices, the insurers competed by offering what is effectively a share in the profits, according to regulators. This profit sharing pushed up the price of force-placed insurance by creating incentives for banks and mortgage servicers to buy force-placed insurance with high premiums. That’s because the higher the premiums, the more that the insurers paid to the banks.
- DFS said that in some cases, QBE paid commissions to insurance agencies and brokers that are affiliates of mortgage servicers. Typically, the commissions are 10 to 20 percent of the premium written on the servicer’s mortgage loan portfolio. Regulators said their investigation indicates that the affiliated agencies and brokers do little or no work for the commissions QBE had paid them.
- In June 2011, QBE acquired from Bank of America (BOA) the force-placed insurance business of a BOA subsidiary named Balboa Insurance. Balboa provided force-placed insurance on Countrywide and BOA-serviced mortgages (many of which were owned by investors) during the period that Countrywide and BOA owned Balboa, as well as on mortgages for other servicers. Regulators said this arrangement was profitable for Countrywide and BOA because of the low loss ratios for force-placed hazard insurance.
- Regulators said that from 2009 to 2011 respectively, QBE Insurance’s actual loss ratios for force-placed hazard insurance in New York were 18.2 percent, 18.5 percent, and 13.5 percent. These loss ratios are substantially below the 55 percent expected loss ratio QBE filed with the Department of Financial Services. QBE Insurance has paid contingent “profit” commissions to its affiliated program manager QBE FIRST when loss ratios were kept below a certain figure, which has ranged from 35 percent to 40 percent.
Key Terms of Settlements
The settlement includes restitution for homeowners who were affected by QBE and Balboa, a $10 million penalty to be paid by QBE, and a set of major reforms. Key terms of the settlement include:
To lower the cost of force-placed insurance going forward for all non-flood business:
- QBE shall file with DFS a premium rate with a permissible loss ratio of 62 percent, supported by the required data and actuarial analysis.
- Every three years, QBE will be required to re-file its rates with DFS for review.
- If QBE’s actual rates in any year result in an actual loss ratio of less than 40 percent for the immediately preceding calendar year, QBE will be required to re-file its rates for the next year for DFS review in order to bring the loss ratio back up.
- QBE must report annually to DFS on its actual loss ratio, earned premiums, itemized expenses, losses, and reserves.
To put a stop to the practices found in DFS’s investigation:
- QBE shall not issue force-placed insurance on mortgaged property serviced by a bank or servicer affiliated with QBE. QBE also shall not pay commissions to a bank or servicer or a person or entity affiliated with a bank or servicer on force-placed insurance policies obtained by the servicer. The company also shall not reinsure force-placed insurance policies with a person or entity affiliated with the banks or servicer that obtained the policies.
- QBE shall not pay contingent commissions based on underwriting profitability or loss ratios. It shall not provide free or below-cost, outsourced services to banks, servicers or their affiliates. It shall not make any payments, including but not limited to the payment of expenses, to servicers, lenders, or their affiliates in connection with securing business.
The agreed-upon reforms will also apply to Balboa as its policies are run-off and should they write new force-placed policies in the future.
To provide restitution, refunds will be provided to consumers through a claims process and a third-party administrator selected by DFS and paid for by QBE for homeowners who have been force-placed at any time after Jan. 1, 2008 and meet the eligibility criteria for one of the following three categories of claimants:
- Homeowners who defaulted on their mortgage or were foreclosed because of force placement.
- Homeowners who were charged for force placement at a coverage amount higher than permitted by their mortgage.
- Homeowners who were erroneously charged for force-placed insurance: either because they had voluntary insurance in effect, or they were charged commercial rates for a residence.
Additionally, under the terms of the settlements, QBE will provide improved disclosures and notices to homeowners; and ensure that the amount of coverage force-placed on any homeowner shall not exceed the last known amount of coverage, provided that if the last known amount of coverage did not comply with the mortgage, then the amount of coverage shall not exceed the replacement cost of improvements on the property.
QBE Issues Statement on Settlement
QBE North America also issued a statement today concerning its settlement agreement. The company said that the settlement is “neither an admission of liability nor a judicial finding,” adding that its management team can now return its full attention to growing the insurer’s overall U.S. insurance business.
“QBE is pleased to have resolved this matter,” QBE North America CEO David Duclos said.
“We value our regulatory relations in the U.S. and remain very engaged and cooperative with all our 50 U.S. state regulators and federal agencies that regulate mortgages. As a relatively new entrant to the U.S. lender-placed insurance (LPI) market, we are keenly interested in determining its future shape and course,” Duclos said.
“With this settlement completed,” he said, “our management team can now return its full attention to growing our overall U.S. insurance business.”
QBE North America Chief Legal Officer Pete Maloney added, “QBE elected to settle the matter to avoid protracted litigation and the need for continuing management attention on this long-running regulatory proceeding.”
QBE said that as required by law, the company filed its premium rates in New York and had them approved by the New York State Department of Financial Services. QBE added that the company has paid commissions as allowed by New York law.