NU Online News Service, April 5, 12:26 p.m.EST

New York state regulators are calling on insurers to justify therates they change for force-placed insurance coverage and say thereis evidence of conflict of interest between bankers andinsurers.

The Department of Financial Services, which has jurisdictionover both the insurance and banking industry, says it is requiringinsurers that deal in the mortgage product to provide detailedinformation covering rates and loss ratio calculations that justifywhat they are charging customers.

The department says it plans to hold hearings in May “to reviewwhether rates for force-placed insurance are excessive and toexamine the relationships between and payments to and from insures,banks, mortgage servicers and insurance agents and brokers.

“It appears that force-placed insurers charge very high premium,but pay out only a very small percentage of those premiums onclaims—as little as 20 cents on the dollar,” says Superintendent ofFinancial Services Benjamin M. Lawsky in a statement. “In addition,questionable payments are made to various players in theforce-placed business, further increasing the profits to insurersand banks.”

He says insurers are to give a “complete breakdown” of how muchthey collect and where that premium is going. In addition, he saysinsurers need to show that the premiums are “appropriate.”

The insurers that are being required to provide informationare:

• Balboa Insurance Co.

• QBE Insurance Corp.

• QBE Financial Institution Risk Services Inc.

• American Security Insurance Co. (Assurant).

• American Bankers Insurance Co. of Florida (Assurant).

• Meritplan Insurance Co.

• American Modern Home Insurance Co.

• Empire Fire and Marine Insurance Co.

• Fidelity and Deposit Co. of Maryland

The department says there is also evidence that banks could beprofiting from a cozy relationship with the carriers by reinsuringthe forced-place products and profiting from the set-up, seeing asmuch as 15 percent or more of the premium going to them. Thisreinsurance set-up, the department says, is presenting a conflictof interest between banks and carriers.

The department says that early investigations of the programshow questionable actuarial conclusions. Based on itsinvestigations “most insurers filed a loss ratio of 55 percent.”However, at least one unnamed major insurer averaged a loss ratioof 22 over the last six years and another a loss ratio of 20.

Force-placed homeowners insurance is coverage that is taken outby a bank or mortgage company when a homeowner fails to maintaintheir own coverage.

The department says the insurance is typically more expensivethan traditional homeowners insurance.

“There appear to be a number of very significant problems withforce-placed homeowners insurance,” says Lawsky. “The price isoften extremely high—as much as ten times the normal rate forhomeowners insurance.”

Those high-rates are causing homeowners to default on theirmortgages and enter foreclosure, which can also adversely affectingthe securitization market for mortgage backed securities.

He also notes that some homeowners have the policies forced onthem even though they have their own insurance in place.

“At the hearings, we will explore whether banks are usingforce-placed insurance to increase their profits at the expense ofhomeowners and investors,” says Lawsky.