Wall Street Journal: Insurers Facing Greater Scrutiny

Apr 5, 2012

The following article was published in the Wall Street Journal on April 4, 2012:

Insurers facing greater scrutiny

By Liz Rappaport and Leslie Scism

New York’s top financial regulator is expanding an investigation of insurers that force homeowners policies on borrowers after turning up evidence that consumers were charged too much, according to people familiar with the situation.

Benjamin M. Lawsky, superintendent of the New York Department of Financial Services, is issuing new subpoenas and formal document requests to several insurers, demanding justification for how their rates and loss ratios were calculated, these people said.

The loss ratio is the percentage of premiums collected by an insurer that is paid out to policyholders. Based on information gathered in initial inquiries since the probe was launched in October, Mr. Lawsky and investigators believe those payouts are as little as 20 cents on the dollar, compared with estimates to regulators of 55 cents.

Insurers issue such “force-placed” policies to homeowners who miss mortgage payments or allow their homeowners’ policy to lapse. Critics say that rates are often exorbitant, partly because of close ties between insurers, agents, mortgage servicers and brokers. Mr. Lawsky’s investigation also is scrutinizing those relationships, these people said.

So far, investigators for Mr. Lawsky have found that 15% to 35% of premiums collected by force-placed insurers flows to brokers in the form of commissions, according to people familiar with the situation. Insurers also paid fees to banks to get reinsurance that shields the insurer from responsibility for paying claims, these people said.

New York officials also turned up evidence that mortgage servicers and insurers mistakenly forced 30% to 40% of homeowners whose cases were reviewed by the agency into getting coverage.

The review includes financial data and other information since 2006, people familiar with the matter said. Mr. Lawsky plans to hold public hearings in May. The agency could decide to toughen regulations, require more disclosure as part of the rate-approval process or launch formal enforcement actions against the financial firms.

Recipients of the document requests include Assurant Inc. and units of QBE Insurance Group Ltd., according to the people. “As a regulated insurance provider in 50 states, we routinely work with regulatory authorities, and we look forward to continued discussions,” Assurant said in a statement.

A spokeswoman for QBE had no immediate comment.

Mr. Lawsky has previously subpoenaed several banks and mortgage servicing companies about their handling of force-placed insurance.

New York’s intensifying probe follows last month’s move by mortgage giant Fannie Mae to begin distancing itself from banks when choosing force-placed insurers. The plan is aimed at lowering costs for borrowers and Fannie Mae.

In addition, California’s insurance commissioner, Dave Jones, told the 10 biggest “lender-placed” insurers operating in the state to lower their rates.

Because many homeowners ran into trouble in the real-estate crisis, force-placed insurance premiums in the U.S. rose to an estimated $5.5 billion in 2010 from $1.5 billion in 2004.

Some homeowners have alleged in lawsuits that they were charged at least nine times more for force-placed coverage than they previously paid for their homeowners’ policy.

Insurers have said such cases are rare, adding that force-placed rates typically are 1.5 to two times higher than homeowners’ coverage. The higher rates are justified, the insurers say, because the properties are high-risk. Their financial exposure is particularly high in Florida because of the foreclosure epidemic there and the state’s vulnerability to hurricanes.

Insurers also have said that regulators approved most of their rates on such policies.

Mark Kunzelmann, a homeowner in North Palm Beach, Fla., alleged in a federal-court lawsuit filed in the Southern District of Florida against Wells Fargo & Co. last year that he was overcharged for force-placed insurance after he and his wife mistakenly let their homeowners’ property coverage lapse.

The San Francisco bank allegedly charged him $10,000 for seven months of coverage. He says he got rid of the force-placed policy by reinstating his own coverage, which costs about $2,500 a year. Wells Fargo denies wrongdoing.

A version of this article appeared April 5, 2012, on page C1 in some U.S. editions of The Wall Street Journal, with the headline: Insurers Facing Greater Scrutiny.