Lawsky Urges Fellow Regulators to Reform Force-Placed Insurance Market

April 9, 2013

New York Financial Services Superintendent Benjamin Lawsky, whose department reached a settlement with the country’s largest “force-placed” or “lender-placed” insurer Assurant last month, is urging fellow regulators from around the country to follow New York’s lead.

Superintendent Lawsky said in a letter addressed to state insurance commissioners on April 5 that New York’s agreement reached with Assurant can serve as “a template” for other states to adopt.

“We urge other commissioners to implement these reforms nationwide to help root out the kickback culture that has pervaded the force-placed insurance industry and lower rates for hard-working homeowners,” he said.

Lawsky said New York “stands ready and willing” to assist any state that is considering moving ahead with similar reforms.

Lawsky’s letter outlines major findings from his department’s investigation.

The investigation found that the premiums charged to homeowners for force-placed insurance had been “two to 10 times higher” than premiums for voluntary insurance, even though the scope of the coverage is more limited.

The loss ratios for force-placed insurance seldom exceed 25 percent. Nevertheless, rate filings made by insurers with the Department of Financial Services reflected loss ratio estimates of 55 to 58 percent, Lawsky said.

He said insurers and banks have built a network of relationships and financial arrangements that have driven premium rates to “inappropriately high levels” ultimately paid for by consumers and investors.

Further, he said, force-placed insurers have competed for business from banks and mortgage servicers through “reverse competition”: i.e., rather than competing for business by offering lower prices, insurers have created incentives for banks and mortgage servicers to buy force-placed insurance with high premiums by enabling banks and mortgage services, through complex arrangements, to share in the profits associated with the higher prices.

The Department of Financial Services said its investigation had found that in one arrangement, for instance, JPMorgan Chase put itself on both sides of the transaction, paying an inflated premium and then reaping a large percentage of those gains back from Assurant by virtue of a reinsurance agreement between a JPMorgan Chase-owned insurer and Assurant, which had 70 percent of the force-placed insurance market in New York. In this manner, JPMorgan Chase made some $600 million since 2006 by taking 75 percent of the profits from the force-placed business it sent to Assurant, according to the department.

On March 21, the Department of Financial Services entered into a settlement with Assurant, the terms of which includes restitution for affected homeowners; a $14 million penalty; and a set of major reforms for Assurant’s force-placed insurance program in New York.

In its settlement announcement last month, Assurant did not admit to any wrongdoing but said the company is modifying certain lender-placed business practices “consistent with new regulations expected to be issued by the New York Department of Financial Services that will apply to all New York-licensed lender-placed insurers of properties in the state.”

In a statement, Assurant Specialty Property CEO Gene Mergelmeyer said, “With matters resolved with the New York Department of Financial Services, we look forward to filing our next generation lender-placed product as we continue to meet the needs of our clients and customers in New York with outstanding service and support.”

Lawsky said his department is continuing its investigation into the force-placed insurance industry. He said his department is encouraging other force-placed insurers and mortgage servicers operating in New York to adopt the reforms to which Assurant has agreed.

Lawsky also said that following New York’s resolution with Assurant, the Federal Housing Finance Agency has proposed a ban on commissions on force-placed policies to banks servicing loans owned or insured by Fannie Mae and Freddie Mac.

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