Consumer advocates and financial services industry officials clashed Thursday over whether banks and insurers are getting paid fairly in the force-placed insurance market.
The showdown came at a hearing held by the National Association of Insurance Commissioners on the controversial product, which is a kind of property insurance policy that banks purchase when mortgage borrowers stop paying for homeowners insurance. Banks receive a portion of the premiums through commissions, reinsurance deals and other payments from the specialty carriers that offer it.
The consumer advocates at the hearing challenged a system that, they said, allows insurers to collect expensive premiums and banks to earn lucrative fees even though the loss rates on such coverage tends to be lower than standard homeowners coverage.
"We understand there is the possibility of additional risks, but that doesn't mean anything goes," testified Peter Kochenberger, executive director of the Insurance Law Center at the University of Connecticut Law School. "It doesn't mean a premium that is 2 to 3, or loss ratio that is 2 to 3 to 4 times better is justified because there may in fact be risks."
Financial industry officials responded by saying that the market is specialized and that they have to be compensated for risks associated with homes that are older, vacant, in disrepair or be located in states prone to natural disasters like hurricanes.
If the fees were so inflated, more insurance companies would be flocking to the business than the two insurance firms that control nearly all the market, said Kevin McKechnie, the executive director of the American Bankers Insurance Association.
"You are going to find very few takers for this kind of risk going forward" if regulators act to curb pricing, he said.
After a wave of consolidation in the force-placed insurance industry, only two major specialty insurers — Assurant and QBE — remain. The business has been acknowledged by Assurant as very profitable.
Banks have to supply the coverage as required by mortgage contracts, and smaller banks are less able to bear the costs and risks associated with force-placed coverage responsibilities than others, he said.
The concept behind force-placed insurance is that mortgage borrowers are contractually required to maintain insurance coverage on their property to protect the interests of lenders.
Though the product is legal, investors and consumer advocates have alleged that banks are overpaying for the policies in exchange for kickbacks from insurers. Servicers and insurers inflate the price of force-placed policies and split the proceeds, critics say.
Birny Birnbaum, executive director for the Center for Economic Justice, said sometimes banks are paid commissions of 11% to 15%, cash payments for marketing and other fees or subsidies. It's uncertain how much work banks are really doing to receive those fees, he and others say.
For instance, "it's unclear what marketing is going on" considering force-placed insurance is mandatory, Birnbaum said. "Regulators haven't done anything to require companies to lower their rates to reasonable levels."
To promote competition in the market, Kochenberger proposed that when the original coverage lapses, the bank continue the policy with the existing carrier instead of taking it to the specialty companies.
Larger banks have offered to do that, McKechnie said, but many of the original insurers are unwilling to continue the policies they see as riskier or say that their rules require them to cancel the policies.
The consumer advocates urged insurance regulators to vet the purported risks more closely and to use their rate authority to limit excessive fees.
In its written testimony, the ABIA urged regulators to give existing federal and state efforts to address issues with force-placed insurance time to work before acting further.
"Further action by the NAIC at this time may result in unintended consequences for homeowners, mortgage investors, and lenders," the testimony said. "We urge the NAIC to allow the existing reforms time to work and reassess whether action is needed at a later time."
The NAIC hearing comes in the wake of a series of state investigations and rate reviews in major states. Both California and New York are demanding that insurers lower rates and have questioned the legitimacy of commissions paid to the banks that procure coverage. The State of Florida and the two government mortgage giants, Fannie Mae and Freddie Mac, have taken an interest in the topic as well.