New York Weighs Insurer Profit Caps on Lapsed Borrowers

Benjamin Lawsky
Benjamin Lawsky, superintendent of the New York State Department of Financial Services. Photographer: Jin Lee/Bloomberg

New York is considering capping profits for insurers that provide mandatory coverage for residential mortgage borrowers who lapse on their premium payments, the state’s financial regulator said.

Costs for such policies, known as force-placed insurance, “seem high and in many cases are exponentially higher than regular homeowners insurance,” Department of Financial Services Superintendent Benjamin Lawsky said in prepared remarks for a hearing today in Manhattan. “The percent of premiums actually spent to cover claims seem extraordinarily low.”

Lawsky is examining whether insurers including Assurant Inc. and banks such as JPMorgan Chase & Co. profit excessively from the policies that homeowners are required to buy to shield mortgage investors against vandalism and storm damage. He said JPMorgan obtains the coverage from Assurant and that the bank then shares in the profits through an insurance subsidiary.

JPMorgan “is, in effect, paying itself high premiums and making big profits without having to provide much coverage, all seemingly at the expense of homeowners and investors,” Lawsky said. “When you combine this close and intricate web of relationships between the banks and insurance companies on the one hand, with the high premiums, low loss ratios and lack of competition on the other hand, it raises serious issues and questions that we need to explore in these hearings.”

Minimum Loss Ratios

Force-placed coverage is often more expensive than standard policies because insurers can’t inspect the properties, and the homes they cover are frequently in areas more prone to hurricanes and other natural disasters, John Frobose, president of Assurant’s American Security Insurance Co. unit, testified at the hearing.

“Lender-placed insurance rates reflect all of these factors,” he said.

Joseph Evangelisti, a spokesman for New York-based JPMorgan, declined to comment on Lawsky’s remarks.

Assurant declined 0.6 percent to close at $36.33 in New York. JPMorgan fell 4.3 percent to $33.93.

Lawsky, who spoke on the first of three days of hearings examining force-placed coverage, said the state should “explore” whether to impose a minimum loss ratio on insurers, without specifying a level. The hearings will also study whether to ban some relationships between banks and insurance companies, he said.

Premiums Tripled

If New York State set a minimum loss ratio, “we would have to sit down and reassess our entire business,” Jim Fiore, chief underwriting officer of QBE Insurance Group Ltd.’s Americas division, testified.

Force-placed premiums have more than tripled to $5.5 billion in 2010 from $1.5 billion six years earlier, Lawsky said. The insurers often pay out less than 25 cents for every dollar in premiums they collect, he said, compared with about 63 cents on a typical homeowner’s policy.

Homeowners are required to pay the cost of force-placed policies. In March, a California regulator asked insurers to reduce rates for the coverage.

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