Florida regulators are investigating the force-placed insurance industry, the state's insurance commissioner says.

Banks purchase force-placed insurance when mortgage borrowers stop paying for homeowners insurance. Though the product itself is legal, investors and consumer advocates have alleged that banks are overpaying for the policies in exchange for kickbacks from insurers.

"We're looking at some of the business practices to ensure they comply with Florida law," says Kevin McCarty, the state's insurance commissioner. "If you look at the general allegations that have been made by [consumer advocates Birny] Birnbaum and [Robert] Hunter, those are the areas that would be of interest."

Birnbaum and Hunter have argued that the industry suffers from "reverse competition," in which servicers and insurers inflate the price of force-placed policies and split the proceeds.

Florida's review is in line with similar reviews in New York and California. But because the catastrophe-prone state accounts for more than 40% of the force-placed insurance premiums nationwide, any actions it takes would carry outsized weight.

McCarty's announcement of the investigation, in an interview Friday, comes ahead of a National Association of Insurance Commissioners hearing on force-placed insurance scheduled for Thursday in Atlanta. McCarty is among those who requested the hearing, he says.

"The sheer growth of the marketplace has raised concerns," McCarty says.

Though insurers would bear the brunt of any regulatory actions, banks have a lot at risk, too. Banks receive a portion of force-placed premiums through commissions, reinsurance deals and other payments from the specialty carriers that offer it. New York's Department of Financial Services estimates that total force-placed premiums have swollen to more than $6 billion a year since the housing crisis began.

Payments to banks are a prominent target in the California and New York reviews, and regulators have pressed banks to explain what work they do to earn them. That question also will be a focus of McCarty's review in Florida, he says.

In hearings held in New York in May, banks argued that the commissions they collect were indistinguishable from those paid to insurance agents who sell policies to homeowners. McCarty appears skeptical of that claim.

"If [a bank] has a contract with an insurance company that automatically places a policy when someone fails to pay, it seems to me the cost would be lower than if you had to go out and find an insurance company," he says.

Florida's heightened concerns about the force-placed market were evident last month, when the Office of Insurance Regulation held a hearing on premium rates proposed by Praetorian Insurance, a subsidiary of force-placed insurer QBE. During the hearing, staffers pressed QBE to produce additional documentation to justify maintaining its current rates and to explain its financial ties with the banks that purchase its coverage.

QBE is the second largest player in the force-placed market, behind Assurant Specialty Property. Florida is planning to subject Assurant's rates to similar scrutiny, McCarty says.

"We have advised an Assurant representative that we are anticipating a rate filing within the next 60 days, so we have an opportunity to ensure the same rigorous standards that we are applying to Praetorian," he says. But that would not necessarily involve a public hearing of the sort to which Praetorian was subjected.

Florida has not yet acted on Praetorian's request for approval of its rates. Should Florida take an equally aggressive stance as New York and California — which have indicated current industry practices are unacceptable — it would likely be a big surprise to the industry. As recently as July 26, Assurant told analysts that it didn't expect other states to impose rate reductions or new regulation.

"We have regular filings and discussions with all the different states, over time," Chief Executive Officer Robert Pollock said on the company's second-quarter results call. "I don't see anything on the horizon, particularly in Florida."

Assurant would work with the state, a company spokeswoman wrote in an email Monday.

"As we submit new lender-placed filings, we anticipate Florida will carefully scrutinize and review the proposed rates to ensure they are actuarially sound as they have done in the past," the spokeswoman wrote.

McCarty has not concluded whether there are problems in the force-placed market, he says. Given that Assurant and QBE account for more than 90% of the overall force-placed market, he says, regulators must be careful not to act in a way that hampers the availability of the product.

Other entities besides state regulators have taken interest in the force-placed market. Fannie Mae announced in March that it would prohibit banks from collecting commissions on policies they purchase and that it wished to purchase force-placed coverage directly from insurance companies. It has not yet implemented those plans.

McCarty is optimistic that the combination of Fannie's actions and state regulatory attention would be good for the market, he says.

"One would think that if the market incentives are aligned properly, it would bring new players to the marketplace," he said.

This story originally appeared at American Banker.


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