NY Regulator Orders Price Cut for 'Forced' Home Insurance - Wall Street Journal

By LESLIE SCISM And LIZ RAPPAPORT

New York's top financial regulator has ordered insurers that sell homeowners policies to struggling borrowers to submit lower prices for review as part of a probe into alleged overcharging by the companies.

Department of Financial Services Superintendent Benjamin M. Lawsky has set a July 6 deadline for the proposed new premium rates for New York homeowners to be filed by the dominant insurers in the "force-placed" insurance business. The insurers are specialty units of Assurant Inc. and QBE Insurance Group Ltd.

An Assurant spokeswoman said its unit is cooperating with the New York regulators and "we are prepared to revise our lender-placed offerings to reflect mortgage market conditions and meet the needs of New York homeowners, lenders and investors." QBE couldn't be immediately reached for comment.

The order follows hearings in May in which Mr. Lawsky accused the insurers and banks of an "intricate web of relationships" that can push distressed families into foreclosure and hurts mortgage-bond investors.

Homeowners with mortgages are generally required to carry homeowner policies to protect their property, which serve as collateral for the loans.

Banks can "force" these policies on customers who allow their insurance to lapse by mistake or because they have stopped paying their mortgages and escrow funds have run short to cover the premiums.

At the hearings, Mr. Lawsky said the business has been highly profitable for the banks and insurers. He said his office found that insurers were paying out less than 25 cents in claims for each $1 of premium collected, compared with the approximately 55 cents they had estimated in their last rate submissions. Assurant and QBE have been using the same rates since 1994, according to the state.

State officials said rates for force-placed insurance can be three times to as much as 10 times the cost of normal homeowner's insurance. New York homeowners have been overcharged by many millions of dollars, Mr. Lawsky said.

Insurers maintain force-placed insurance prices are typically about two times higher than regular homeowners' policies because the houses they cover carry higher-than-average risk. Many properties become abandoned and subject to vandalism.

John Nadel, a stock analyst with Sterne Agee who follows Assurant, said the impact on the company would depend on the size of rate reductions and whether the regulatory push to curtail profit margins spreads nationwide. In May, he lowered his 2013 profit estimate and downgraded the stock to "underperform."

Mr. Lawsky said the force-placed insurance market lacks the sort of competition that would keep premiums down. In New York, the two insurers have 90% of the market. "Our hearings suggest a lack of competition, high prices, and low loss ratios, all of which hurt homeowners," he said.

As a result of the foreclosure crisis, the size of the force-placed insurance market has grown from $1.5 billion in 2004 to $5.5 billion in 2010.

Write to Leslie Scism at leslie.scism@wsj.com