04 April 2012

WSJ: Insurers facing greater scrutiny

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 is also scrutinising those relationships, these people said.

So far, investigators for Mr Lawsky have found that 15 per cent to 35 per cent 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.

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

Because many homeowners ran into trouble in the real estate crisis, force-placed insurance premiums in the US 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.

Full article

© Wall Street Journal