Banking, Insurance Officials Defend Force-Placed Insurance
Anason, Dean, American Banker
Byline: Dean Anason
ATLANTA a Consumer advocates and financial services industry officials clashed Thursday over whether banks and insurers are getting paid fairly in the force-placed insurance market.
The showdown came at a hearing held by the National Association of Insurance Commissioners on the controversial product, which is a kind of property insurance policy that banks purchase when mortgage borrowers stop paying for homeowners insurance. Banks receive a portion of the premiums through commissions, reinsurance deals and other payments from the specialty carriers that offer it.
The consumer advocates at the hearing challenged a system that, they said, allows insurers to collect expensive premiums and banks to earn lucrative fees even though the loss rates on such coverage tends to be lower than standard homeowners coverage.
"We understand there is the possibility of additional risks, but that doesn't mean anything goes," testified Peter Kochenberger, executive director of the Insurance Law Center at the University of Connecticut Law School. "It doesn't mean a premium that is 2 to 3, or loss ratio that is 2 to 3 to 4 times better is justified because there may in fact be risks."
Financial industry officials responded by saying that the market is specialized and that they have to be compensated for risks associated with homes that are older, vacant, in disrepair or be located in states prone to natural disasters like hurricanes.
If the fees were so inflated, more insurance companies would be flocking to the business than the two insurance firms that control nearly all the market, said Kevin McKechnie, the executive director of the American Bankers Insurance Association.
"You are going to find very few takers for this kind of risk going forward" if regulators act to curb pricing, he said.
After a wave of consolidation in the force-placed insurance industry, only two major specialty insurers a Assurant And QBE a remain. The business has been acknowledged by Assurant as very profitable.
Banks have to supply the coverage as required by mortgage contracts, and smaller banks are less able to bear the costs and risks associated with force-placed coverage responsibilities than others, he said.
The concept behind force-placed insurance is that mortgage borrowers are contractually required to maintain insurance coverage on their property to protect the interests of lenders. …