Chaired by Florida Office of Insurance Regulation Deputy Commissioner, NAIC Working Group to Review Creditor-Placed Insurance Model Law Revisions Today
Aug 6, 2015
Chaired by Florida Office of Insurance Regulation Deputy Commissioner for Property and Casualty David Altmaier, the National Association of Insurance Commissioners’ (“NAIC’s”) Creditor-Placed Insurance Model Act Review Working Group meets today at 2 p.m. (CT)–3 p.m. (ET).
As part of today’s agenda, the Working Group will review key takeaways from an NAIC 2012 public hearing on lender/creditor-placed insurance, after which members will discuss potential approaches to revising the current NAIC Creditor-Placed Insurance Model Act (#395). Completion of work on the Model is expected to conclude in time for the NAIC’s 2015 Fall National meeting.
Key takeaways from the NAIC’s 2012 public hearing on lender-placed insurance are listed below:
Points made by industry proponents:
- Lender-placed insurance (“LPI”) differs from other lines of business. Mortgage servicers engage insurance companies to provide coverage on properties where no other coverage is in place.
- Insurers provide coverage for all exposed properties in the servicer’s portfolio without inspection or underwriting of the risk. This is a broad range of risks, including homes that are vacant, unoccupied or in catastrophe-prone areas.
- The product includes automatic, continuous and retroactive coverage provisions.
- LPI premiums grew due to the mortgage crisis as more homeowners stopped making mortgage payments.
- Industry advocates dispute the notion that lender-placed insurance operates in a market characterized by “reverse competition.”
- Insurers have chosen to exit the market rather than enter, despite claims of excess profits.
- LPI is an important risk-management tool for lenders that provides value to homeowners.
- LPI helps lenders satisfy regulatory requirements promulgated by federal regulatory agencies and facilitates the secondary market for mortgage-backed securities.
- LPI protects federal taxpayers and other policyholders and state taxpayers by keeping substantial numbers of policies out of residual market plans.
- LPI is a safety net because homeowners have ample opportunity to avoid LPI and purchase other coverage.
- The importance of LPI has been growing, both as a result of increased demand for LPI in the wake of the nation’s housing crisis and also because of rising vulnerability of property to damage from increased catastrophe activity.
Points made by consumer representatives:
- LPI exhibits characteristics of “reverse competition,” where the entity selecting the insurer is not the entity paying for the product.
- The existence of reverse competition does not drive down prices as normal competition would. Instead, insurers compete for lenders’ business by providing financial considerations to the lender. These expenses are included in the premiums charged to borrowers, thus driving up the cost.
- LPI is a limited coverage compared to homeowners insurance because it includes no personal property, no additional living expenses and no liability coverage.
- LPI premiums quadrupled from 2004 to 2011.
- Despite the limited coverage, LPI loss ratios tend to be in the 15-24 percent range compared with 60-75 percent for homeowners insurance.
- Compensation is given to mortgage servicers in the form of commissions, cash payments for marketing, or free/subsidized services for mortgage servicers.
- There are unnecessary placements and inadequate disclosure to consumers regarding such transactions.
- Commissions are far in excess of work/service that is provided or necessary.
- Rates and charges are based on unreasonable expenses and unreasonable actuarial analysis and assumptions.
- Sales through surplus lines insurers are not subject to state solvency and market regulatory standards.
- The use of captive reinsurance is a tool to allow lenders or producers to garner additional profits at the expense of borrowers.
- Reverse competition abuses are missed as they fall in between the cracks of insurance and banking regulation.
- LPI is often regulated as a commercial product.
- Data demonstrates that the lack of underwriting only explains, at most, a small fraction of the higher LPI prices. Some borrowers do not have home insurance-and must be force placed-because they are higher risk and cannot get the coverage. However, most borrowers become force-placed because of non-payment of premiums, not higher insurance risk.
- The lack of underwriting should result in lower acquisition expenses for LPI writers.
- The LPI market is dominated by two insurers, whose agents are not “vetting and selecting” LPI insurers as they do for typical policies.
- The Creditor-Placed Insurance Model Act does not cover insurance on collateralized real property.
- States may wish to consider adopting a minimum loss ratio, allowing only reasonable expenses associated with the provision of LPI, and prohibiting expenses associated with servicing and profits that flow to lenders.
Part of the NAIC’s Property and Casualty Insurance Committee, the Working Group members (including Deputy Commissioner Altmaier) are:
- Alex Romero, Alaska
- Joel Laucher, California
- Kurt Swan, Connecticut
- Sharon Shipp, District of Columbia
- Caryn C. Carmean, Illinois
- David Browning, Mississippi
- Carrie Couch, Missouri
- John G. Franchini, New Mexico
- Buddy Combs, Oklahoma
- Joseph Torti III/Elizabeth Dwyer, Rhode Island
- Mark Worman/J’ne Byckovski, Texas
- Mary Bannister/Rebecca Nichols, Virginia
- Scott Fitzpatrick, Washington
- Jason Levine, Wisconsin
Materials from the 2012 public hearing are provided via hyperlink below:
- Birnbaum Presentation
- CFA Testimony
- Frobose Presentation
- Frobose Testimony
- Hartwig Presentation
- Hartwig Testimony
- Kochenburger Presentation
- Markowicz Testimony
- McKechnie Testimny
- QBE Presentation
- Rollins Presentation
- Rollins Testimony
- Scott Presentation
- Scott Testimony
AUDIO: August 9, 2012 Joint C & D Committee Private Lender-Placed Insurance Meeting
- MP3 Audio 1 (12 MB, 30 min)
- MP3 Audio 2 (14 MB, 33 min)
- MP3 Audio 3 (14 MB, 33 min)
- MP3 Audio 4 (15 MB, 36 min)
- MP3 Audio 5 (13 MB, 32 min)
- MP3 Audio 6 (8 MB, 20 min)
- MP3 Audio 7 (13 MB, 32 min)
- MP3 Audio 8 (17 MB, 37 min)
- MP3 Audio 9 (16 MB, 32 min)
Should you have any questions or comments, please contact Colodny Fass.
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