The Wall Street Journal
By: Leslie Scism and Liz Rappaport
May 17, 2012
New York's top financial regulator turned up the heat on banks and insurers that sell homeowners policies to struggling borrowers, accusing them of an "intricate web of relationships" that pushes distressed families "over the foreclosure cliff" and also hurts mortgage-bond investors.
New York Department of Financial Services Superintendent Benjamin M. Lawsky's harsh words opened three days of hearings into whether banks have overcharged consumers for the policies while earning fat profits "for what appears to be very little work," as he put it Thursday.
The hearings focus on "force-placed" policies. Homeowners with mortgages are generally required to carry homeowner policies to protect their property, which serves as collateral for the loans. Banks can "force" these policies on customers who allow their insurance to lapse by mistake, or because they have stopped paying on their mortgages and escrow funds have run short to cover the premiums.
The hearings, held in a drab room in downtown Manhattan, were well-attended by insurance- and banking-industry representatives. A handful of homeowners who have suffered from being forced into expensive policies testified, as did consumer advocates and insurance executives. Bank executives are in the hot seat Friday.
Mr. Lawsky's office has issued subpoenas and formal document requests to banks and insurers in recent months, demanding answers on how premiums for the policies are calculated. He said his initial inquiry shows that while 63 cents of every dollar in premiums goes to pay a claim on a typical homeowner policy, the specialty companies that work with the banks often pay less than 25 cents of each premium dollar for a claim.
"The rest is mostly profit," he said in his opening remarks.
Mary V. Burton, who owns a home in Staten Island, New York, said in her testimony that, after losing her job as a social worker in 2008, she didn't renew her homeowner's insurance policy. Citigroup's C +4.78%CitiMortgage put her into a policy that pushed up her monthly mortgage and premium payments by 50%, making it "impossible for me to get back on track," she said.
A Citigroup spokesman said the company alerts borrowers about possible force-placed coverage, and encourages them to obtain their own policy.
Representatives from specialty insurers Assurant Inc. AIZ -2.09%and QBE Insurance Group Ltd. QBE.AU +3.09%said they will work with Mr. Lawsky's department to resolve issues raised by his department.
According to insurers, force-placed insurance prices are typically 1.5 to two times higher than regular homeowners' policies because the houses they cover carry higher-than-average risk. Many properties are abandoned and subject to vandalism.
They also said a major reason for higher prices is that force-placed insurers agree to cover all properties in a lender's portfolio, regardless of condition or location, and this saddles them with a disproportionate number in hurricane-prone coastal areas.
An executive from Assurant acknowledged that the percentage of each premium paid out for claims is currently low, but said that setting a minimum loss ratio--which Mr. Lawsky's department is exploring--would be "difficult."
Mr. Lawsky, who joined the department last summer and has ramped up numerous probes of insurers and banks, said in the hearing that insurers had an obligation to resubmit their rates given that their predicted loss ratios "were turning out to bear little resemblance to reality year after year after year."
J. Robert Hunter, the director of insurance at the Consumer Federation of America, said that forced-place insurance "abuses fall into the cracks between insurance and banking regulation."
Mr. Lawsky said the "web of tight relationships" existed among banks, their subsidiaries and insurers. Among other things, the insurers often pay "large commissions" to bank insurance-brokerage subsidiaries, and they sometimes buy reinsurance from bank subsidiaries. Under a reinsurance contract, the reinsurer pays some of the claims on the underlying insurance.
"Thus, the banks pay high premiums for coverage that is highly profitable and then those big profits revert right back to the banks through reinsurance agreements," Mr. Lawsky said. "Banks purchasing this insurance seem to have little incentive to keep prices down."
Mr. Lawsky said the practices hurt mortgage-bond holders because banks often advance the high premium payments to the insurers and then recover the payments once homes land in foreclosure are sold.
The insurers said they are successful because of the services they provide, and disputed suggestions that they benefit from inappropriate ties.
In one example, Mr. Lawsky said that J.P. Morgan Chase JPM +5.53%& Co. pays high forced-place insurance premiums to one insurance company, Assurant, which sends 75% of those premiums back to J.P. Morgan by buying reinsurance from a Vermont-based J.P. Morgan subsidiary.
J.P. Morgan did not immediately respond to a request for comment.