--QBE agreed to pay $10 million to New York in 'force-placed'
insurance settlement
--QBE pact bans commissions and certain other payments to
banks
--Company will file new rate plans with state
By Saabira Chaudhuri and Leslie Scism
QBE Insurance Group Ltd. (QBIEY, QBE.AU) has agreed to pay $10
million to the state of New York and to quit paying commissions to
banks as part of a settlement aimed at lowering the cost of home
insurance sold when borrowers drop their original coverage.
The insurer will file new rates for state regulators to review
and provide restitution to some homeowners to settle allegations of
overpriced insurance and excessive profits.
The settlement, announced Thursday, follows hearings by New York
Department of Financial Services Superintendent Benjamin Lawsky
last year that grilled QBE, other insurers and their banking
partners about their relationships. The state maintained those
relationships have been highly profitable for the companies at the
expense of consumers.
A representative of QBE declined to comment.
The settlement follows a March 21 pact with Assurant Inc. (AIZ),
the largest seller of the "force-placed" home insurance in the U.S.
Assurant agreed to pay a $14 million penalty, adopt the same rate
cuts, business-practice changes and provide restitution to some New
York homeowners to settle similar allegations.
The policies are "forced" on borrowers who drop their required,
standard homeowners coverage, which protects banks' collateral.
Struggling borrowers may seek to save money by canceling their
original policies that are required when they take out a mortgage,
unaware they will be hit by much-costlier forced coverage if they
fail to restore coverage on their own.
"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," Gov. Andrew
M. Cuomo said in announcing the QBE settlement Thursday. "The
nation-leading reforms that we're putting in place will mean lower
home-insurance costs and better protections for many working New
Yorkers."
The New York State DFS said QBE competed for business from banks
and mortgage servicers through what is known as "reverse
competition." Rather than competing by offering lower prices, the
insurers competed by offering what is effectively a share in the
profits, pushing up the price of force-placed insurance by creating
incentives for banks and mortgage servicers to buy force-placed
insurance with high premiums, the state said.
The agency said QBE paid commissions to insurance agencies and
brokers that were affiliates of mortgage servicers.
It cited data showing QBE's actual claims costs for force-placed
hazard insurance in New York from 2009 to 2011 were substantially
below the 55% expected loss ratio the insurance company filed with
the department.
Among the terms of the settlement, QBE will file a premium rate
with a permissible loss ratio of 62%, supported by analysis and
data to the DFS--a move, the agency noted, will "substantially
reduce" homeowners' premiums.
If QBE's actual rates in any year result in a loss ratio of less
than 40%, QBE will be required to refile its rates for the next
year for DFS review to bring the loss ratio back up.
In early April, Mr. Lawsky dispatched a letter to other states
to use the state's Assurant settlement as a way to lower costs for
consumers in other parts of the country.
Separately, the Federal Housing Finance Agency, which regulates
mortgage firms Fannie Mae (FNMA) and Freddie Mac (FRE), filed a
notice in late March seeking public comment on a plan to ban
nationally the same commissions and fees Assurant agreed to forgo
in the New York pact.
The issue is important to Fannie Mae and Freddie Mac because
they pick up a large portion of the bill for unpaid insurance
costs.
Write to Saabira Chaudhuri at saabira.chaudhuri@dowjones.com and
Leslie Scism at leslie.scism@wsj.com
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