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.