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Cuomo proposes tough reforms for force-placed insurers

New York Governor Andrew Cuomo has proposed new legislation to regulate the controversial force-placed insurance sector in the state.

Supporters of the bill claim that it will prevent pricing for the product, which is bought by banks to cover properties where the homeowner has failed to obtain insurance, from being artificially inflated.

The suggested reforms follow a two-year investigation by the Department of Financial Services (DFS), which led to Australian insurer QBE being forced to pay $10mn back to homeowners affected by inflated prices.

In a separate case, Assurant, the largest force-placed insurance provider in New York, agreed to pay $14mn. Both companies also agreed to reform business practices and to comply with the need for greater oversight from the DFS.

The DFS investigation found that the cost of lender-placed cover can be two to 10 times the cost of the original policy, despite weaker coverage terms.

New York Superintendent of Financial Services Benjamin Lawsky said the investigation discovered a "kickback culture" in the industry. "These new rules will help ensure that homeowners remain protected and force-placed insurers don't simply slide back to the bad old practices of the past," he said.

The proposed reforms would prevent force-placed insurers from covering property mortgaged by an affiliate bank or mortgage supplier. If approved, the new regulation would halt the practice of reverse competition, where force-placed insurers compete to provide cover by offering profit shares with the mortgage provider.

The reforms would also prevent force-placed insurance companies from reinsuring policies on properties mortgaged by their affiliates. They would be forced to refund force-placed policyholders for any overlap with voluntary policies bought before or after the start of the force-placed cover.

Under the new proposals, force-placed insurers would have to update the DFS when loss ratios drop below 40 percent to ensure premiums are not inflated.

Cuomo said the investigation revealed widespread abuses of consumers by banks and mortgage companies.

"Insurers should be on notice that New York State is going to continue rooting out abuse in the industry and protecting taxpayers," he said.

Force-placed insurance is purchased when a homeowner allows their standard property insurance policy to lapse. The bank or investor that holds the mortgage then obtains coverage for the property to protect their interest.

The cost of the premium is subsequently levied on the homeowner and the bank and insurance company then share in the profits.

The tidal wave of defaults and foreclosures that emerged following the financial crisis turned lender-placed insurance from a niche specialty business into a sector worth some estimated $2.6bn in written premiums annually.

In the report, Cuomo said the troubling web of kickbacks and payoffs at certain force-placed insurers helped push premiums sky-high for many homeowners.

"Today we are taking a major step in righting this injustice and reforming the industry by proposing tough new regulations to protect homeowners," he added.

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