The nation’s largest force-placed insurer has settled with New York regulators in an agreement that includes restitution for homeowners who paid grossly-inflated premiums and reforms for an industry under fire for dubious alliances with big banks.
The insurance company Assurant, which has financial ties to JPMorgan Chase, will pay a $14 million penalty to New York regulators in addition to the restitution.
The legal agreement is the largest action taken against entities involved in forcing high-cost homeowners’ insurance policy upon U.S. consumers.
Force-placed insurance refers to a policy taken out by a bank, lender, or mortgage servicer when a borrower does not maintain the insurance required on his home by the terms of the mortgage.
This situation can occur if homeowners allow their policy to lapse, but this often is a result of financial hardship.
A force-placed policy can also occur if the bank or mortgage servicer determines that the borrower does not have a sufficient amount of coverage.
“The force placed insurance industry has for too long been plagued by an intricate web of relationships between insurers and banks that pushed distressed families over the foreclosure cliff,” said Governor Andrew M. Cuomo Thursday. “Today’s agreement starts us on the road to reform, which will clean up this industry and truly protect working people.”
New York regulators’ investigation found that Assurant competed for business from banks and mortgage servicers through what is known as “reverse competition” — competing by offering what is effectively a share in the profits instead of lower prices.
JPMorgan Chase has made $600 million since 2006 by taking 75 percent of the profits from the business it gave Assurant, said New York regulators.
New York officials say Assurant competed for business by:
- Paying commissions to insurance agents and brokers affiliated with the banks even though the agents and brokers did not perform the customary tasks that would justify a commission.
- Paying banks’ “expenses” related to force-placed insurance. These expenses were typically a percentage of premium and were paid to banks that did not have agents or brokers that would collect a premium.
- Paying lump sum amounts, such as one bank’s $1 million termination fee for switching its business to Assurant from another insurer.
- Allowing a reinsurance company owned by a bank to take as much as 75 percent of the premium and therefore 75 percent of the profit. A reinsurance company provides insurance to insurance companies by sharing risk. But since there was little risk in force-placed insurance relative to the high premiums, this was effectively a way to transfer profits.
A measure of how profitable force-placed insurance has been for Assurant is how little it has paid in claims — what is known as the loss ratio, New York regulators say.
In its 1994 rate filing with New York State Department of Financial Services (DFS), one of Assurant’s subsidiaries based its rate on the expectation that it would pay 58 percent of premium on claims. In fact, from 2006 through 2011, that subsidiary actually paid only in a range from 17 percent to 25 percent.
Despite years when it paid out claims less than half of what it projected, Assurant did not file for lower rates. For voluntary homeowners insurance, the loss ratio has historically been around 63 percent nationally.
Under the agreement with New York regulators, Assurant will file with DFS a premium rate with a permissible loss ratio of 62 percent, supported by the required data and analysis “that is acceptable both professionally and to DFS.”
This will substantially reduce homeowners’ premiums, regulators say.
Also read: Regulator Wrongly Halted Plan to Discount ‘Force-Placed’ Insurance, Consumer Groups Decry