Florida Office of Insurance Regulation Holds Public Rate Hearing for Praetorian Insurance Company to Address Lender-Placed Insurance
Jul 3, 2012
The Florida Office of Insurance Regulation (“OIR”) held a public rate hearing today, July 3, 2012 to review Praetorian Insurance Company’s (“Praetorian’s”) recent rate filing in which it requested an average statewide rate change of -2.2 percent for its property collateral protection program, which is also known as “lender-placed insurance.”
The proposed rate would be effective September 1, 2012 for new and renewal business. The requested rate change is not uniform, and some areas would be subject to higher rates. Property and Casualty Deputy Commissioner Rich Koon, General Counsel Belinda Miller and Actuary Bob Lee presided over the hearing on behalf of the OIR.
Recently, lender or force-placed policies have come under heightened scrutiny. These policies are partially intended to protect a bank’s interest on a property.
QBE Specialty Insurance Company representatives Nicholas Pastor and John Dickerson provided opening comments and testimony on the filing. QBE, a surplus lines insurer, is moving its lender-placed policies into Praetorian. Recently, Fannie Mae loan requirements changed to prohibit surplus lines insurers from selling force-placed coverage. Mr. Pastor noted Praetorian is writing new policies in high foreclosure areas such as Miami-Dade, Broward and Pasco counties, and that the proposed rates are consistent with the voluntary market in these areas.
The filing is based on a program through which Praetorian will write risks based on the loan value of the foreclosed properties, rather than the replacement cost. Some of the rates would increase, while others would decrease.
Following the opening comments, the OIR officials asked a series of questions about the filing. Mr. Lee noted that Praetorian’s rate filing should be based on the statutes and regulations, not the rates of its competitors. Mr. Lee also expressed concerns that the new Praetorian policies will not have coverage from the Florida Hurricane Catastrophe Fund (“FHCF”), even though the filing suggests they will. Further, the filing uses 2011 reinsurance costs for a prospective 2012 filing.
Mr. Lee asked for additional details regarding the reinsurance figures in the filing that were derived from certain rate analyses. The OIR officials also expressed concerns with the significant upward trend in the non-catastrophe losses and expenses contained in the filing.
Next, Florida Insurance Consumer Advocate Robin Westcott testified on the filing, noting that lender-based insurance is not a new type of product, and there have been many inequities for consumers in this market. However, the explosion of foreclosures has heightened the issues.
Continuing her testimony, Ms. Westcott echoed the concerns with the trends regarding non-catastrophe losses and expenses.
On a broad note, Ms. Westcott said there should be increased transparency requirements for insurers regarding lender-based policies.
Birny Birnbaum, Executive Director of the Center for Economic Justice, was very critical of the rate filing in his testimony at today’s hearing. He noted that Praetorian’s proposed rates seem to be based on those of its competitors, rather than past data. He also suggested the filing should exclude “unreasonable expenses.” Further, he stated the rate requested is significantly higher than the rate indication and should be reduced.
The record will remain open until July 13, 2012 for additional written comments.
The Consumer Federation of America (“CFA”) filed testimony with the OIR for today’s hearing. To view the testimony in PDF format, click here. A CFA news release is reprinted below.
Florida Should Require Praetorian Insurance to Cut Rates Charged to Homeowners by at Least 44 Percent
Washington D.C. (July 3, 2012) — In testimony filed today, the Consumer Federation of America (CFA) called for the Florida Office of Insurance Regulation (OIR) to require Praetorian Insurance Company to cut homeowners’ insurance rates by at least 44.1 percent. Praetorian sold in excess of $430 million in “force placed” insurance in Florida in 2011, as Balboa Insurance Company and QBE Specialty Insurance Company. Praetorian has requested that the rates for the largest insurer in the group, Balboa, remain unchanged.
The rates under review are for force-placed insurance — an insurance policy imposed by a lending institution on a borrower’s property — when a borrower does not keep his or her fire insurance in force. Due to the recent tough economic and housing situation, many more policies are now force-placed. The number of homes insured by Balboa nationally increased dramatically from 3,598 in 2005 to 319,926 in 2010, according to available data.
“A major problem with the use of FPI insurance is ‘reverse competition’, which drives rates up for consumers,” said J. Robert Hunter, CFA’s Director of Insurance and former Texas Insurance Commissioner, who authored CFA’s testimony. “Reverse competition occurs when insurers compete to get lenders to allow them to sell coverage by providing financial considerations to the lender, including commissions, subsidized services, and other things of value. These expenses are included in the premiums charged to borrowers, which makes the prices much higher,” Hunter said.
Hunter, an actuary, pointed out that, “The rate filing is a massive actuarial overreach. For every dollar Praetorian charged consumers between 2007 and 2011, it paid out only four and one-half cents in claims payments! The rest of the money went for either excessive profits for the insurer or kickbacks to banks and other lenders.”
CFA calculated the 44.1 percent rate reduction by removing kickbacks and other improper actuarial assumptions from rates being charged. Moreover, the recommended price cut is based on only a partial review of the filing, since all material related to hurricane CAT pricing, including the charge for reinsurance, is not available to the public because Praetorian claimed this information as a “trade secret.”
“If Praetorian used the same type of actuarial overreach in these hidden documents as they did in the public documents, a rate decrease of much more, up to 85 to 90 percent, would be justified,” said Hunter. “Partial availability of the data upon which a rate filing is based is a disservice to the people of Florida. I recommend changing this practice so that interested parties can see the entire case made by insurers for the rates that Floridians must pay.”
“Making rate filings for force-placed insurance known to produce excessive prices for the borrower is a practice that has gone on for decades,” said Hunter. “It is time to stop this sham. The Commissioner should send a message that protects Floridians and can be used as a beacon for all states as they strive to fix these outrageous practices.”
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