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1701A S. 2nd Street Austin TX 78704 (512) 912 1327 (Fax) 912 1375 | Credit Insurance Continued Credit Insurance Consumers Overcharged by $2 Billion a Year The loss ratio – the ratio of benefits paid on behalf of consumers to premiums paid by consumers – is the single most important measure of the value of credit insurance to consumers. Insurance regulators have determined that a 60% is the minimum loss ratio for credit life and credit disability insurance to provide reasonable benefits to consumers in relation to premium costs. The 60% loss ratio standard for credit life and disability insurance is a modest one. Actual historical loss ratios for group life insurance and group accident and health insurance exceed 90% and 75%, respectively. Historical loss ratios for private passenger automobile insurance are just under 70%. Our review of actual credit insurance loss ratios shows that state legislatures and/or state insurance regulators, with only a very few exceptions, have failed to protect credit insurance consumers. Actual historical credit insurance loss ratios are far below even the NAIC model’s modest 60% loss ratio standard. Table 1 shows 1997 countrywide credit insurance premiums, loss ratios and commissions by coverage. The 1997 credit insurance loss ratios ranged from 12% to 49%, depending upon the coverage. Overall, less than 39 cents on the premium dollar was paid out in claims on behalf of consumers. Table 1 Countrywide Credit Insurance Experience, 1997
These loss ratios are unconscionably low – far below any reasonable measure of benefit in relation to the premium charged to consumers. The actual loss ratios fall far below even the NAIC minimum standards. The credit involuntary unemployment and credit property loss ratios are particularly egregious. If credit insurance had been priced to provide even minimum reasonable benefits to consumers in relation to premiums paid, consumers would have paid $2 billion less in premium for credit insurance in 1997. Overall credit insurance overcharges were almost 37% of total premium charged. For credit unemployment and credit property (other), premiums were excessive by more than 80% of premium. While a few states do a good overall job of regulating credit insurance and protecting consumers – New York, Maine and Pennsylvania – the vast majority of states fail miserably in protecting credit insurance consumers. Table 2 shows the 1995-97 combined loss ratio for credit life, disability, unemployment and property and the amount of premium overcharges by state. The worst states for credit insurance consumers include Louisiana, North Dakota, Mississippi, Alaska, Nebraska and Minnesota where overall loss ratios were less than 32% and consumer overcharges were around 50% or more of total premium. Forty-five states and the District of Columbia had three-year overall credit insurance loss ratios of less than 50%. Three-year overcharges exceed $100 million in 14 states.
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