Industry Letter

TO: State Insurance Commissioners

FROM:  Benjamin M. Lawsky
Superintendent of Financial Services
New York State Department of Financial Services

DATE: April 5, 2013

RE: Reforming Force-placed Insurance

Background

In October 2011, the New York State Department of Financial Services (DFS) launched an investigation into the force-placed insurance industry.

• 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 a mortgage.
• This occurs most frequently when a homeowner allows his or her policy to lapse, typically due to financial hardship, where the lender asserts that the homeowner does not have sufficient coverage.

Investigative Findings

In May 2012, DFS conducted public hearings – taking oral and written testimony from consumers who had been force-placed, consumer advocates, the insurance industry, and insurance experts.

DFS’s investigation revealed that:

• The premiums charged to homeowners for force-placed insurance are two to ten 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 DFS reflected loss ratio estimates of 55 to 58 percent.
• 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.
• 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.
  • 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, Inc., the nation’s largest force-placed insurer (with 70% of the market in New York), by virtue of a reinsurance agreement between a JPMorgan Chase-owned insurer and Assurant.
  • In this manner, JPMorgan Chase made approximately $600 million since 2006 by taking 75 percent of the profits from the force-placed business it sent to Assurant.

Settlement with Assurant

On March 21, 2013, DFS entered into a settlement with Assurant, the terms of which includes restitution for homeowners who were harmed; a $14 million penalty; and a set of major reforms for Assurant’s force-placed insurance program in New York.

• A press release describing the terms of the settlement, and the consent order itself, are accessible at http://www.dfs.ny.gov/about/press2013/pr1303211.htm.

Specifically, the agreement requires Assurant to:

• File with DFS force-placed premium rates with a permissible loss ratio of 62 percent, supported by credible data and an actuarial analysis that is acceptable to DFS. This will substantially reduce premiums.
• Re-file its rates with DFS for review every three years thereafter.
• Re-file its rates sooner than every three years if Assurant’s actual loss ratio for any preceding year dips below 40 percent.
• Report its actual loss ratio, earned premiums, itemized expenses, losses, and reserves to DFS annually.
• Make refunds to eligible homeowners who were force-placed at any time after January 1,2008.

Further, the agreement prohibits Assurant from:

• Issuing any force-placed insurance on mortgaged property serviced by a bank or servicer affiliated with Assurant.
• Paying any commissions (including contingent compensation based on underwriting profitability or target loss ratios) to any bank or mortgage servicer (or person or entity affiliated therewith) on force-placed business.
• Reinsuring force-placed insurance policies with any person or entity affiliated with the bank or servicer that obtains the policies.
• Make any other payments to servicers, lenders, or their affiliates in connection with securing force-placed insurance business.

Subsequent Developments and Next Steps

Following DFS’s resolution with Assurant, the Federal Housing Finance Agency proposed a ban on commissions on force-placed policies to banks servicing loans owned or insured by Fannie Mae and Freddie Mac.

DFS is continuing its investigation, and encouraging other force-placed insurers and mortgage servicers operating in New York to adopt the reforms to which Assurant has agreed.

Implications for Other States

The 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. New York stands ready and willing to assist any state that is considering moving ahead with similar reforms. For further information, please contact Executive Deputy Superintendent Joy Feigenbaum, the head of DFS’s Financial Frauds and Consumer Protection Division, at [email protected] or (212) 480-6082.