An investigation by the New York State Department of Financial Services points to reverse competition as a major cause of the high prices. Force-placed insurers do not compete for business by luring consumers with attractive rates; they compete by offering lenders commissions, expense payments, and profit-sharing arrangements, which drive premiums up instead of down.

“The entity selecting the insurance company is not paying the premium,” said J. Robert Hunter, the director of insurance for the Consumer Federation of America and a longtime critic of the industry. “So they pick the one that gives the biggest kickback.”

Last month New York regulators announced plans to halt such practices, beginning with a settlement with one of the country’s largest force-placed insurers, Assurant. Under the deal, Assurant, which neither admitted nor denied wrongdoing, would pay the state a $14 million penalty, set up a system to compensate certain borrowers who were harmed, and end various payment arrangements with banks and servicers. The prohibition on payments would take effect only after the regulators, either through additional settlements or rule changes, made them applicable to every force-placed insurance company doing business in New York.

Complaints about the cost of force-placed insurance have simmered for years, but the issue gained prominence during the foreclosure crisis, when distressed homeowners found themselves further burdened by the policies’ big bills. “It was driving people into foreclosure and preventing people already in foreclosure from getting loan modifications,” said Justin Haines, the director of the foreclosure prevention unit at Bronx Legal Services.

Mr. Hunter says he sees the New York settlement as an important start to “a very strong trend.” California and Florida have also looked into industry practices and are acting to lower rates. And the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, has proposed a rule that would ban the payment of commissions to lenders and servicers for placing coverage.

The National Association of Insurance Commissioners held its own hearing on force-placed insurance last year. The “bottom line” for regulators is that they need to make certain that these carriers aren’t violating states’ rebating laws, which prohibit insurers from offering inducements to select purchasers, said Mike Chaney, the Mississippi insurance commissioner and the chairman of the association’s property and casualty committee.

In New York, regulators are also requiring Assurant to file a new premium that better reflects actual losses. From 2006 to 2011, very low loss ratios allowed the company to keep a much larger share of premiums than kept by standard home insurers, according to the investigation.

Also, some New York borrowers who were placed with Assurant policies will be eligible for refunds. To qualify, the policy must date no earlier than Jan. 1, 2008. Eligible homeowners fall into one of three categories: those who defaulted or ended up in foreclosure because of the policy; those charged for an unnecessarily high coverage limit; and those charged for a force-placed policy even though their voluntary coverage hadn’t lapsed.

Article source: http://www.nytimes.com/2013/04/14/realestate/a-settlement-to-benefit-certain-borrowers-in-new-york.html?partner=rss&emc=rss