California Commissioner Considering ‘Force-placed’ Regulations

A meeting slated for Thursday called for by California Insurance Commissioner Dave Jones to deal with “force-placed” insurance has cast the dye for debate on whether such insurance should be filed in the category of specialty lines or commodity.

Other than fleeting references expressing an interest in drafting regulations to govern force-placed, also called “lender-placed,” insurance, Jones has said little else publicly. On Monday Jones referenced his desire to create new the regulations when he announced a 30.5 percent rate reduction for lender-placed homeowners’ insurance coverage offered by American Security Insurance Co., an Assurant Inc.-owned company.

“The Department is also contemplating regulations that would require all insurers that write lender placed property insurance to file the rates as a commodity rather than as a specialty line,” Jones said in the statement announcing the American Security Insurance rate reduction that resulted from a CDI investigation launched in March, which yielded an estimated $42.7 million savings to homeowners.

Filing as a commodity restricts an insurer’s ability to deviate from the standard prior approval template. Traditional homeowners’ insurance and personal automobile insurance are already required to file as commodity coverages. Jones’ proposed regulation would eliminate the exemption for the high premium master policies that provide lender placed property coverage.

There are those who question such regulations, and wonder how they will impact insurers and mortgage lenders.

“This came out of left field,” said Armand Feliciano, vice president of the Association of California Insurance Companies and Property Casualty Insurers Association of America.

Feliciano said he will request clarification and state his concerns about such regulations to the commissioner during Thursday’s meeting.

When a bank lends an individual money to buy a home or a car it requires homeowners or automobile insurance, and if the individual fails to maintain that insurance, lenders then place insurance on the home or car to protect their security interest. The practice is referred to by many as “force-placed,” or “lender-placed,” insurance.

However, it’s Feliciano’s contention that such insurance isn’t really “forced-placed.” He also maintains that these requirements are necessary for banks to protect their assets, and that it’s the banks – not the insurers – that those concerned about the practice should be looking at.

“When you say ‘forced,’ did they not sign a contract?” Feliciano said. “If you’re going to lend someone $500,000, you’re going to want some assurances. Obviously (Jones) can’t regulate the banks. But he should talk to the banks. The banks tell us what to cover.”

Requiring lender-placed insurance to be filed as a commodity would force insurers to treat the large numbers of homes they typically deal with en masse in lender-placed insurance situations instead like a personal homeowners policy, requiring insurers to look at the risks of each individual home instead of offering coverage rates for dozens or hundreds of assets together, Feliciano said.

“What’s the rationale?” he added.

In March, Jones contacted the state’s 10 largest lender-placed coverage insurers over concerns about excessive rates, and he directed them to submit new rate filings. CDI examined the insurers’ annual financial statement data, and found many cases of low loss ratios, which were a flag to CDI officials that rates charged by insurers may be excessive, according to a statement from Jones’ office.

The American Security rate reduction is a result of that examination, and it’s the first insurer to lower rates based on the examination.

CDI spokesman Dave Althausen said that other than the press releases in March and on Monday the commissioner has made no other public references to creating the new regulations, which according to the spokesman have yet to be written.

Althausen said no other comments on the regulations would be offered until Thursday’s workshop, which is scheduled for 10:30 a.m. at CDI’s office on the 22nd floor of 45 Fremont St. in San Francisco.

A letter sent out announcing Thursday’s meeting states the department is considering amending California Code of Regulations Title 10, Section 2642.7 – the section allows for certain lines to be disaggregated for ratemaking purposes into subcategories for commodity and specialty insurance – to the following:

Raise the $75,000 premium threshold to qualify as “specialty insurance” to $1 million; raise the $100,000 deductible threshold to $500,000; clarify that group policies and master policies are not considered “single” policies for the purpose of qualifying as specialty insurance; clarify that excess and/or umbrella policies written over personal lines do not qualify as specialty insurance; clarify that an underlying policy must cover a commercial exposure before the excess/umbrella policy can be considered specialty insurance; raise the $500,000 underlying limit threshold to $1 million for excess/umbrella policies to qualify as-specialty insurance; clarify that while certain lines, sublines and risks qualify as specialty insurance they may also be filed as commodity insurance; and expressly provide that lender placed insurance does not qualify as specialty insurance.

Force-placed insurance has garnered more attention in the past year following a long period of increasing foreclosures and news stories that have called attention to financial relationships between lenders and lender-placed insurers. And the financial sector continues to be hammered by bad headlines. On Wednesday the Justice Department said it’s seeking $1 billion from Bank of America for alleged fraud for selling defective mortgages.

In launching the investigation Jones said several homeowners have complained that they pay more for forced-placed insurance than they would if they obtained the insurance themselves.

“Homeowners have complained that they are forced to pay for homeowners’ insurance purchased for them by their mortgage lender at a price higher than insurance they could obtain themselves-yet another facet of lender practices associated with the mortgage crisis,” Jones said in his March statement at the start of the CDI investigation. “Recent investigative reports detail the lack of arm’s length transactions between lenders and insurers and, in some cases, a financial relationship between lender and insurer, which means the insurer is able to charge a higher price than would otherwise be the case.”

Among Feliciano’s concerns about the proposed new regulations is that changing the filings from a specialty template, in which insurers can file rates backed by actuarial evidence, filing under a commodity template could establish rates that are too low.

There already exists under Proposition 103’s prior approval language the ability for CDI to compel insurers to lower rates that they think are too high, he added.

“The argument from our perspective is if you’re concerned about the rates being high, they can compel these guys to come back if these rates are high,” Feliciano said.