PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:
Proposed Action:
Addition of Part 227 (Regulation 202) to Title 11 NYCRR.
Statutory authority:
Financial Services Law, sections 202, 301 and 302; Insurance Law, sections 301, 308, 2110, 2303, 2304, 2324 and 2403; and arts. 21, 23 and 24
Subject:
Force-placed insurance.
Purpose:
To set forth rules regarding, among other things, the rating and placement of, and practices related to, force-placed insurance.
Substance of proposed rule (Full text is posted at the following State website:http://www.dfs.ny.gov):
This rule sets forth rules for the rates for and placement of force-placed insurance and prohibits certain practices related to force-placed insurance in order to protect homeowners and investors from harm caused by excessive force-placed insurance rates, questionable business practices and relationships in the force-placed insurance industry, and inadequate notice of force-placed insurance.
Section 227.0 sets forth the purpose of the rule.
Section 227.1 provides definitions applicable to the rule.
Section 227.2 sets minimum adequate notification requirements to ensure homeowners understand their responsibility to maintain homeowners insurance, and that they may purchase voluntary homeowners insurance coverage at any time.
Section 227.3 sets the maximum amount of force-placed insurance coverage that an insurer may issue on a New York property.
Section 227.4 requires an insurer, insurance producer, or affiliate that receives correspondence related to force-placed insurance from a borrower on behalf a servicer to accept any reasonable form of written confirmation of a borrower’s existing insurance coverage.
Section 227.5 requires an insurer, insurance producer, or affiliate to refund all force-placed insurance premiums for any period of overlapping insurance coverage within fifteen days of receiving evidence demonstrating that the borrower has had in place hazard insurance coverage that complies with the mortgage’s requirements to maintain hazard insurance.
Section 227.6 prohibits certain practices with respect to force-placed insurance, including: the payment of commissions to servicer-affiliated insurance producers; the sharing of force-placed insurance premiums or risk with a servicer affiliate; and issuing force-placed insurance on property serviced by a servicer affiliated with the insurer.
Section 227.7 requires insurers to regularly inform the Department of loss ratios actually experienced and re-file rates when actual loss ratios are below 40 percent, and sets a permissible loss ratio for rate filings to ensure that premiums are set at a rate reasonably related to paid claims.
Text of proposed rule and any required statements and analyses may be obtained from:
Brian Montgomery, Department of Financial Services, One State Street, New York, NY 10004, (212) 480-2296, email: Brian.Montgomery@dfs.ny.gov
Data, views or arguments may be submitted to:
Same as above.
Public comment will be received until:
45 days after publication of this notice.
Regulatory Impact Statement
1. Statutory authority: The Superintendent’s authority for the promulgation of this rule derives from Sections 202, 301 and 302 of the Financial Services Law (“FSL”) and Sections 301, 308, 2110, 2303, and 2304 and Articles 21, 23 and 24 of the Insurance Law.
Section 202 of the FSL establishes the office of the Superintendent and designates the Superintendent of Financial Services as the head of the Department of Financial Services (“Department”).
FSL Section 301 authorizes the Superintendent to take such action as the Superintendent deems necessary to protect and educate users of financial products and services.
FSL Section 302 and Insurance Law Section 301, in relevant part, authorize the Superintendent to effectuate any power accorded to the Superintendent by the Insurance Law, the Banking Law, the Financial Services Law, or any other law of this state and to prescribe regulations interpreting the Insurance Law.
Insurance Law Section 308 authorizes the Superintendent to address to any authorized insurer or its officers any inquiry relating to its transactions or condition or any matter connected therewith.
Article 21 of the Insurance Law sets forth the duties and obligations of insurance producers. Insurance Law Section 2110 provides grounds for the Superintendent to refuse to renew, revoke or suspend the license of an insurance producer.
Article 23 of the Insurance Law authorizes the Superintendent to regulate property/casualty insurance rates. Insurance Law Section 2303 provides that rates shall not be excessive, inadequate, unfairly discriminatory, destructive of competition or detrimental to the solvency of insurers. Insurance Law Section 2304 provides standards for the making of rates and the information that may be furnished in support of a rate filing. Insurance Law Section 2324 prohibits insurers, insurance agents and insurance brokers from providing rebates on, or inducements to purchase, insurance.
Article 24 of the Insurance Law regulates trade practices in the insurance industry by prohibiting practices that constitute unfair methods of competition or unfair or deceptive acts or practices. Insurance Law Section 2403 prohibits persons from engaging in defined or determined violations as defined in Article 24 of the Insurance Law.
2. Legislative objectives: This rule sets forth rules for the rates for and placement of force-placed insurance and prohibits certain practices related to force-placed insurance in order to protect homeowners and investors from harm caused by excessive force-placed insurance rates, questionable business practices and relationships in the force-placed insurance industry, and inadequate notice of force-placed insurance.
An investigation by the Department found that the rates for force-placed hazard insurance bear little relation to insurers’ actual loss experience, resulting in high profits, a portion of which insurers commonly pass on to mortgage servicers and their affiliates through commissions, other payments, and reinsurance arrangements, to the detriment of homeowners and investors. The Department also found that homeowners often failed to receive adequate notice that insurers and servicers were force-placing insurance policies on their homes. The rule sets minimum adequate notification requirements to ensure homeowners understand their responsibility to maintain homeowners’ insurance, and that they may purchase voluntary homeowners insurance coverage at any time. These provisions of the rule require insurers, insurance producers and their affiliates to comply with recently amended provisions of the federal Real Estate Settlement Procedures Act (“RESPA”) that become effective on January 10, 2014. In addition, these provisions require insurers, insurance producers and their affiliates to make clear and conspicuous disclosures on the outside of envelopes to better inform homeowners that the envelopes contain important information, and require insurers, insurance producers and their affiliates to disclose that they or another third party is staffing a mortgage servicer’s telephone lines, if that is the case.
The Department’s investigation also found that insurers offered financial incentives to mortgage servicers and their affiliates, including commissions to servicer-affiliated insurance producers who performed little or no work. The investigation also found that insurers entered into arrangements that transferred a significant percentage of force-placed insurance profits to affiliates of servicers. In addition, one insurer provided force-placed insurance on mortgages serviced by an affiliate of the insurer. These practices not only artificially inflated premiums charged to homeowners, but created a conflict of interest in that servicers had an incentive to purchase more costly force-placed insurance where they earned a portion of the premiums or profits from the placement of force-placed insurance. This rule prohibits these practices.
Further, actual loss ratios for force-placed hazard insurance have been significantly lower than both the expected loss ratios insurers filed with the Department and the actual loss ratios for voluntary homeowners insurance. Insurers have failed to regularly update and adjust their rates despite these significant discrepancies. This rule requires insurers to regularly inform the Department of loss ratios actually experienced, re-file rates when actual loss ratios are below 40 percent, and sets a permissible loss ratio for rate filings to ensure that premiums are set at a rate reasonably related to paid claims.
3. Needs and benefits: The Department’s investigation revealed multiple, industry-wide practices that violate New York law. This rule is necessary to ensure that force-placed insurance market participants comply with New York law. This rule is also necessary to protect homeowners and investors from the harm caused by the multiple law violations.
The Department’s investigation of force-placed insurance has resulted in agreements with all admitted insurers writing force-placed insurance in New York. The agreements include many of the key provisions in this rule. This rule will ensure that new entrants to the market operate on a level playing field with current market participants.
4. Costs: Every New York authorized insurer that issues force-placed insurance on New York property has already agreed to the key provisions of this rule regarding prohibited conduct and financial arrangements. As a result, these insurers and their affiliates should incur only minimal additional costs to comply with the requirements of this rule. These minimal costs may vary from insurer to insurer. Insurance producers may also incur minimal additional costs to comply with the notice requirements of this rule. Any additional costs insurance producers incur as a result of these requirements should be minimal because federal law imposes similar notice requirements. The public benefit of ensuring that rates are not excessive, that improper financial incentives are not paid, and that homeowners receive adequate notice to ensure that they understand their responsibility to maintain homeowners’ insurance outweighs the incidental costs of complying with this rule.
The cost to the Department will be minimal because existing personnel are available to verify and ensure compliance with this rule. There are no costs to any other state government agency or local government.
5. Local government mandates: The rule imposes no new programs, services, duties or responsibilities on any county, city, town, village, school district, fire district or other special district.
6. Paperwork: Section 227.2 of this rule sets minimum adequate notification requirements to ensure homeowners understand their responsibility to maintain homeowners insurance, and that they may purchase voluntary homeowners insurance coverage at any time. These provisions of the rule require insurers, insurance producers and their affiliates to comply with recently amended provisions of the federal Real Estate Settlement Procedures Act (“RESPA”) that become effective on January 10, 2014. In addition, these provisions require insurers, insurance producers and their affiliates to make clear and conspicuous disclosures on the outside of envelopes to better inform homeowners that the envelopes contain important information, and require insurers, insurance producers and their affiliates to disclose that they or another third party is staffing a mortgage servicer’s telephone lines, if that is the case.
Section 227.7 of this rule requires every insurer that issues force-placed insurance to file force-placed insurance premium rates with a permissible loss ratio of at least 62 percent within 30 days of the effective date of the rule. This rule also requires every insurer that issues force-placed insurance to re-file their rates every three years and, commencing on January 1, 2015 and continuing annually thereafter, to re-file their force-placed insurance premium rates for any force-placed insurance policy form that has had an actual loss ratio of less than 40 percent for the immediately preceding calendar year. This rule also requires every insurer that issues force-placed insurance to report to the Superintendent no later than April 1 of each year, with respect to force-placed insurance policy forms issued during the preceding calendar year, the: (1) actual loss ratio; (2) earned premium; (3) itemized expenses; (4) paid losses; (5) loss reserves; (6) case reserves; and (7) incurred but not reported losses.
7. Duplication: This rule will not duplicate any existing state rule. Portions of this rule track certain provisions of RESPA relating to notices concerning force-placed insurance that become effective on January 10, 2014.
8. Alternatives: This rule addresses excessive rates and improper financial arrangements in the force-placed insurance industry, and ensures that homeowners receive adequate notice of their responsibility to maintain homeowners insurance. The Department has determined that there are no other viable alternatives to this rule. Every insurer subject to this rule has agreed to the key provisions of this rule regarding prohibited conduct and financial arrangements.
9. Federal standards: This rule requires insurers and insurance producers to provide certain additional notices to homeowners in addition to notice requirements concerning force-placed insurance that are required by the recent amendments to RESPA that become effective January 10, 2014.
10. Compliance schedule: This rule will take effect 30 days after publication in the State Register.
Regulatory Flexibility Analysis
1. Effect of rule: This rule sets forth rules for the rates for and placement of force-placed insurance and prohibits certain practices related to force-placed insurance in order to protect homeowners and investors from harm caused by excessive force-placed insurance rates, questionable business practices and relationships in the force-placed insurance industry, and inadequate notice of force-placed insurance.
This rule is directed to insurers, insurance producers, and their affiliates. Insurers, most insurance producers, and most affiliates of insurers and insurance producers affected by this rule do not come within the definition of “small business” set forth in section 102(8) of the State Administrative Procedure Act, because they are not independently owned and operated and/or do not employ 100 or fewer individuals.
This rule will not impose significant burdens on those insurance producers and affiliates of insurers and insurance producers that are small businesses because federal law imposes requirements similar to the provisions of this rule that apply to insurance producers and affiliates of insurers and insurance producers.
2. Compliance requirements: Section 227.2 of this rule sets minimum adequate notification requirements to ensure homeowners understand their responsibility to maintain homeowners’ insurance, and that they may purchase voluntary homeowners’ insurance coverage at any time. These provisions of the rule require insurance producers and affiliates of insurers and insurance producers to comply with recently amended provisions of the federal Real Estate Settlement Procedures Act (“RESPA”) that become effective on January 10, 2014. In addition, these provisions require insurance producers and affiliates of insurers and insurance producers to make clear and conspicuous disclosures on the outside of envelopes to better inform homeowners that the envelopes contain important information, and require insurance producers and affiliates of insurers and insurance producers to disclose that they or another third party is staffing a mortgage servicer’s telephone lines, if that is the case.
3. Professional services: Small businesses to which this regulation may apply will not need professional services to comply with this rule. This rule does not require producers and affiliates to provide notices to homeowners on behalf of mortgage servicers; it merely sets standards for the form of notices that must be provided should producers and affiliates choose to provide notices. Most such producers already provide notices on behalf of servicers, and will not need professional services to revise those notices to comply with this rule. This rule does not apply to or affect local governments.
4. Compliance costs: This rule imposes no compliance costs on local governments. The Department does not anticipate that this rule will impose significant additional costs on small businesses to which this rule may apply. This rule does not require producers and affiliates to provide notices to homeowners on behalf of mortgage servicers; it merely sets standards for the form of notices that must be provided should producers and affiliates choose to provide notices. Most such producers and affiliates already provide notices on behalf of servicers, and will not incur significant costs to revise their existing notices to comply with this rule. Moreover, the recent amendments to RESPA impose requirements similar to this rule, and producers and affiliates should not incur significant additional costs to implement the few additional requirements of this rule.
5. Economic and technological feasibility: Small businesses to which this regulation may apply will not incur an economic or technological impact as a result of this rule. This rule does not require producers and affiliates to provide notices to homeowners on behalf of mortgage servicers; it merely sets standards for the form of notices that must be provided should producers and affiliates choose to provide notices. Most such producers and affiliates already provide notices on behalf of servicers, and will not incur significant costs to revise their existing notices to comply with this rule. Moreover, the recent amendments to RESPA impose requirements similar to this rule. To the extent that small businesses need to update their computer systems to comply with this rule, such an update can be performed in conjunction with the update that will be required to comply with the recent amendments to RESPA, and therefore any costs imposed by this rule should be minimal.
This rule does not apply to or affect local governments.
6. Minimizing adverse impact: This rule applies equally to all insurers and insurance producers, regardless of their size. The rule does not impose any adverse or disparate impact on small businesses. This rule does not apply to or affect local governments.
7. Small business and local government participation: Small businesses and local governments will have an opportunity to participate in the rule making process when the rule is published in the State Register.
Rural Area Flexibility Analysis
1. Types and estimated numbers of rural areas: Insurers, insurance producers, and their affiliates to which this regulation applies do business in every county of New York State, including rural areas as defined in section 102(10) of the State Administrative Procedure Act. The proposed regulation will apply to all insurers, insurance producers, and their affiliates, including those located in rural areas.
2. Reporting, recordkeeping and other compliance requirements; and professional services: Section 227.2 of this rule sets minimum adequate notification requirements to ensure homeowners understand their responsibility to maintain homeowners insurance, and that they may purchase voluntary homeowners insurance coverage at any time. These provisions of the rule require insurers, insurance producers and their affiliates to comply with recently amended provisions of the federal Real Estate Settlement Procedures Act (“RESPA”) that become effective on January 10, 2014. In addition, these provisions require insurers, insurance producers and their affiliates to make clear and conspicuous disclosures on the outside of envelopes to better inform homeowners that the envelopes contain important information, and require insurers, insurance producers and their affiliates to disclose that they or another third party is staffing a mortgage servicer’s telephone lines, if that is the case.
Section 227.7 of this rule requires every insurer that issues force-placed insurance to file force-placed insurance premium rates with a permissible loss ratio of at least 62 percent within 30 days of the effective date of the rule. This rule also requires every insurer that issues force-placed insurance to re-file their rates every three years and, commencing on January 1, 2015 and continuing annually thereafter, to re-file their force-placed insurance premium rates for any force-placed insurance policy form that has had an actual loss ratio of less than 40 percent for the immediately preceding calendar year. This rule also requires every insurer that issues force-placed insurance to report to the Superintendent no later than April 1st of each year, with respect to force-placed insurance policy forms issued during the preceding calendar year, the: (1) actual loss ratio; (2) earned premium; (3) itemized expenses; (4) paid losses; (5) loss reserves; (6) case reserves; and (7) incurred but not reported losses.
3. Costs: Every New York authorized insurer that issues force-placed insurance on New York property has agreed to the key prohibitions of this rule. As a result, insurers and their affiliates should incur minimal additional costs to comply with the requirements of this rule, including those located in rural areas. These minimal costs may vary from insurer to insurer. Insurance producers and their affiliates may also incur minimal additional costs to comply with the notice requirements of this rule. Any additional costs insurance producers incur as a result of these requirements should be minimal because federal law imposes similar notice requirements. The public benefit of ensuring that rates are not excessive, that improper financial incentives are not paid, and that homeowners receive adequate notice to ensure that they understand their responsibility to maintain homeowners insurance outweighs the incidental costs of complying with this rule.
4. Minimizing adverse impact: The requirements of this rule will apply equally to all insurers, insurance producers, and their affiliates, whether they are located in rural or non-rural areas.
5. Rural area participation: This notice is intended to provide entities in rural and non-rural areas with the opportunity to participate in the rule making process. Interested parties will have an opportunity to participate in the rule making process when the rule is published in the State Register.
Job Impact Statement
The Department does not believe that this rule will have any impact on jobs or employment opportunities, including self-employment opportunities. This rule sets forth rules for the rates for and placement of force-placed insurance and prohibits certain practices related to force-placed insurance in order to protect homeowners and investors from harm caused by excessive force-placed insurance rates, questionable business practices and relationships in the force-placed insurance industry, and inadequate notice of force-placed insurance.
