NU Online News Service, Aug. 10, 12:25 p.m.EST

ATLANTA—Regulators promised to delve more deeply intolender-placed insurance, saying there may need to be moreregulation of that line of business.

The comments came after a public hearing held here during theNational Association of Insurance Commissioners' Summer NationalMeeting. The hearing was held as the federal Consumer FinancialProtection Bureau proposed rules on the sale of lender-placedinsurance.

Lender-placed insurance—also known as force-placed insurance—isproperty insurance put on a home by a mortgage lender when theowner's insurance lapses.

“Before this came up in the last several months, I was unawareof this issue,” said Sharon P. Clark, Kentucky insurancecommissioner and chair of the NAIC's Market Regulation and ConsumerAffairs Committee. “We have not received any complaints and thishas not been an area of discussion. Several of the sister statesare in the same position. We are not nearly as informed as Florida,Texas and New York.”

Florida Insurance Commissioner and NAIC President Kevin M.McCarty said because there are only two companies that dominate themarket, the focus needs to be on whether rates for the coverage arejustified.

The commissioners also promised greater scrutiny of compensationpaid to agents, lending institutions, and costs associated withadministration of placements.

Similar to testimony he gave before a fact-finding committee in New York, Birny Birnbaum, executivedirector of the Center of Economic Justice, told regulators herethat the rates force-placed insurers charge are not justified whenexamining the companies' performance and profits over theyears.

Consumers, he said, are not offered the same insuranceprotections they receive from the admitted markets, where coverageincludes liability and personal property indemnification.

Birnbaum also took issue with reinsurance agreements that ofteninvolve ceding premium to the lenders as part of the insuranceprogram, thereby calling into question the integrity of theunderwriting.

“The purpose is not for risk management, but to share thepremium and to charge for more services,” said Birnbaum, addingthat the current insurer-lender relationship is “an incentive forabuse.”

Robert Hartwig, president of the Insurance InformationInstitute, and Kevin McKechnie, executive director of the AmericanBankers Insurance Association, defended the rates force-placedinsurers charge, saying carriers do not underwrite individualrisks, but rather provide a portfolio of coverage to lenders wherethe insurers are taking on risks “sight unseen,” with virtually noinformation about them.

Hartwig said the recent rise in force-placed insurance coincideswith the economic crisis and increase in foreclosures. As theeconomy and housing market improve, he said, the premium volumewill drop because fewer consumers become delinquent on theirmortgages, which he cited as the reason for triggering thecoverage.

McKechnie defended the payments that thelenders—acting as servicers or agents on the risks—receive. He saidthe compensation is small, and necessary for the work lenders doduring the process.

James Novak, senior vice president and general counsel for QBEFirst, disputed Birnbaum's assertion that QBE and Assurant compriseover 99 percent of the force-placed insurance market. He also saidQBE gives consumers ample warning when the coverage is about to beimposed, and urges them to obtain insurance elsewhere before ithappens.

Insurers also defended the higher rates they charge, saying thatbecause the risks are primarily in catastrophe zones, higherpremiums are needed to prepare for what they say is theinevitability of major losses.

John Frobose, president, lending solutions with AssurantSpecialty Property, also said rates are closer to two times higherthan the voluntary market, and not ten times as consumer advocatessaid.

The carrier representatives also noted that few carriers are inthe force-placed market because they do not want the high level ofexposure without detailed underwriting.

While the debate raged over the adequacy of rate, Birnbaum saidthe issue is really the need for better regulation of themarket.

“I don't think there is malice on the part of the industry,”said Birnbaum. “A handful of servicers dominate. [The problem] Ithink has more to do with the structure of the market.”

Meanwhile, the Consumer Financial Protection Bureau, createdunder the Dodd-Frank Act, has proposed new rules regarding the saleof force-placed insurance, requiring servicers to give advancenotice and pricing information before charging consumers for thecoverage.

Servicers would also be required to terminate the insurancewithin 15 days if it receives evidence that the borrower has thenecessary insurance and the insurer would refund the force-placedinsurance premiums.

There will be a 60-day comment period on the rules, until Oct.9. The agency says it will issue final rules in January.