Governor Andrew M. Cuomo today announced that a New York State Department of Financial Services (DFS) investigation has produced an additional settlement with a major force-placed insurer, QBE, which requires the company to implement New York's nation-leading reforms to help better protect homeowners from abuse in this industry.
The QBE settlement includes restitution for homeowners who were harmed, a $10 million penalty paid to the State of New York, and a set of reforms -- first agreed to last month by Assurant, Inc., the nation's largest force-placed insurer, in a DFS settlement -- that will save homeowners, taxpayers, and investors millions of dollars going forward through lower rates.
Together with DFS's previous settlement with Assurant, today's agreement with QBE means that companies responsible for at least 90 percent of the force-placed insurance market in New York have signed onto the Cuomo Administration's nation-leading reforms. (QBE has been the second-largest force-placed insurer both nationally and in New York since it acquired Balboa Insurance Company's -- a subsidiary of Bank of America -- force-placed insurance business in 2011. Bank of America insurance holding company is also a signatory to the settlement.)
"The kickbacks and payoffs in the force-placed insurance industry used to be a dirty little secret that pushed far too many families off the foreclosure cliff, but my Administration's investigation is helping put a stop to those abuses," said Governor Cuomo. "The nation-leading reforms that we're putting in place will mean lower home insurance costs and better protections for many working New Yorkers."
Benjamin M. Lawsky, Superintendent of Financial Services, said, "The momentum behind New York's force-placed insurance reforms is continuing to build. We urge other regulators to pick up the ball and run with it by implementing New York's reforms nationwide -- so that all homeowners, regardless of where they live, are better protected from abuse."
Earlier this month, Superintendent Lawsky sent a letter to other state insurance commissioners urging them to implement New York's force-placed insurance reforms nationwide. The letter is available here.
The Findings of DFS's Investigation of QBE
In October 2011, DFS launched an investigation into the force-placed insurance industry, including QBE and its subsidiaries. Force-placed insurance is insurance taken out by a bank, lender, or mortgage servicer when a borrower does not maintain the insurance required by the terms of the mortgage. This can occur if the homeowner allows their policy to lapse (often due to financial hardship), if the bank or mortgage servicer determines that the borrower does not have a sufficient amount of coverage, or if the homeowner is force-placed erroneously.
The DFS investigation revealed that the premiums charged to homeowners for force-placed insurance can be two to ten times higher than premiums for voluntary insurance -- despite the fact that force-placed insurance provides far less protection for homeowners than voluntary insurance.
Indeed, even though banks and servicers are the ones who choose which force-placed insurance policy to purchase, the high premiums are ultimately charged to homeowners, and, in the event of foreclosure, the costs are passed onto investors. And when the mortgage is owned or backed by a government-sponsored enterprise, such as Fannie Mae or Freddie Mac, those costs are ultimately borne by taxpayers.
Troubling Relationships, Reverse Competition
DFS's investigation revealed that QBE competed for business from the banks and mortgage servicers through what is known as "reverse competition." That is, rather than competing by offering lower prices, the insurers competed by offering what is effectively a share in the profits. This profit sharing pushed up the price of force-placed insurance by creating incentives for banks and mortgage servicers to buy force-placed insurance with high premiums. That's because the higher the premiums, the more that the insurers paid to the banks.
In some cases, QBE paid commissions to insurance agencies and brokers that are affiliates of mortgage servicers. Typically, the commissions are ten to twenty percent of the premium written on the servicer's mortgage loan portfolio. The evidence from the Investigation indicates that the affiliated agencies and brokers do little or no work for the commissions QBE had paid them.
In June 2011, QBE acquired from Bank of America (BOA) the force-placed insurance business of a BOA subsidiary named Balboa Insurance Company. Balboa provided force-placed insurance on Countrywide and BOA-serviced mortgages (many of which were owned by investors) during the period that Countrywide and BOA owned Balboa, as well as on mortgages for other servicers. This arrangement was highly profitable for Countrywide and BOA because of the low loss ratios for force-placed hazard insurance. In addition, the arrangement created a potential conflict of interest insofar as Countrywide's and BOA's bottom line could improve as their Balboa subsidiaries force placed more policies.
Inappropriately Sky-high Premiums That Cost Homeowners, Taxpayers, and Investors
One measure of how profitable force-placed insurance has been for QBE is how little the company has paid in claims as compared to premiums taken in--what is known as the loss ratio.
From 2009 to 2011 respectively, QBE Insurance's actual loss ratios for force-placed hazard insurance in New York were 18.2 percent, 18.5 percent, and 13.5 percent. These loss ratios are substantially below the 55 percent expected loss ratio QBE filed with the Department.
In addition, QBE Insurance has paid contingent "profit" commissions to its affiliated program manager, QBE FIRST when loss ratios were kept below a certain figure, which has ranged from 35 percent to 40 percent -- both significantly below the expected loss ratios QBE Insurance filed with the Department. This creates a troubling incentive for QBE FIRST to keep loss ratios as low as possible.
Key Terms of the Settlements
The settlement signed today includes restitution for homeowners who were harmed by QBE and Balboa, a $10 million penalty to be paid by QBE, and a set of major reforms.
Superintendent Lawsky said, "QBE has done the right thing by adopting these reforms. We now need to ensure that the entire industry in New York -- 100 percent of it -- is subject to our reforms."
The key terms of today's settlement include:
To lower the cost of force-placed insurance going forward for all non-flood business:
QBE shall file with DFS a premium rate with a permissible loss ratio of 62 percent, supported by the required data and actuarial analysis that is acceptable both professionally and to DFS. This will substantially reduce homeowners' premiums.
Every three years, QBE will be required to re-file its rates with DFS for review.
If QBE's actual rates in any year result in an actual loss ratio of less than 40 percent for the immediately preceding calendar year, QBE will be required to re-file its rates for the next year for DFS review in order to bring the loss ratio back up.
QBE must report annually to DFS on its actual loss ratio, earned premiums, itemized expenses, losses, and reserves.
To put a stop to the improper practices found in DFS's investigation, many of which helped QBE support inflated premiums:
QBE shall not issue force-placed insurance on mortgaged property serviced by a bank or servicer affiliated with Assurant.
QBE shall not pay commissions to a bank or servicer or a person or entity affiliated with a bank or servicer on force-placed insurance policies obtained by the servicer.
QBE shall not reinsure force-placed insurance policies with a person or entity affiliated with the banks or servicer that obtained the policies.
QBE shall not pay contingent commissions based on underwriting profitability or loss ratios.
QBE shall not provide free or below-cost, outsourced services to banks, servicers or their affiliates.
QBE shall not make any payments, including but not limited to the payment of expenses, to servicers, lenders, or their affiliates in connection with securing business.
The above reforms will also apply to Balboa as its policies are run-off and should they write new force-placed policies in the future.
To provide restitution to those who were harmed:
Refunds will be provided to consumers through a claims process and a third-party administrator selected by DFS and paid for by QBE for homeowners who have been force-placed at any time after January 1, 2008 and meet the eligibility criteria for one of the following three categories of claimants:
Homeowners who defaulted on their mortgage or were foreclosed because of force placement.
Homeowners who were charged for force placement at a coverage amount higher than permitted by their mortgage.
Homeowners who were erroneously charged for force-placed insurance: either because they had voluntary insurance in effect, or they were charged commercial rates for a residence.
Additionally, under the terms of the settlements, QBE will provide improved disclosures and notices to homeowners; and ensure that the amount of coverage force placed on any homeowner shall not exceed the last known amount of coverage, provided that if the last known amount of coverage did not comply with the mortgage, then the amount of coverage shall not exceed the replacement cost of improvements on the property.