Credit Insurance Continued

Reverse Competition and Ineffective Regulation Lead to Massive Overcharges

The dominant characteristic of credit insurance markets throughout the country is reverse competition. The credit insurance policy is a group policy sold to a lender who then issues certificates to individual borrowers. Because the lender purchases the policy, credit insurers market the product to the lenders and not to the borrower -- the ultimate consumer who pays for the product. This market structure leads insurers to bid for the lender’s business by providing higher commissions and other compensation to the lender. Greater competition for the lender’s business leads to higher prices of credit insurance to the borrower.

When states establish prima facie rates for credit life and credit disability insurance, credit insurers are generally allowed to charge lower rates if they want. Few credit insurers do. Because of reverse competition, a credit insurer who wants to offer the ultimate consumer a lower rate will simply not be able to get a lender to select the product. The lender will select another credit insurer who, by charging a higher rate to the ultimate consumer, can offer a higher commission to the lender.

When presumptive rates are set too high, competition does not force credit insurers to offer lower rates in the market. In the case of credit life and credit disability, presumptive rates have clearly been too high to achieve the 60% target loss ratio. For credit unemployment and credit property insurance, there are typically no presumptive rates and state regulators have shown dismal performance in protecting consumers from excessive rates caused by reverse competition.

In the cases of credit property and credit unemployment coverages, commissions to lenders are as much as four times greater than claim payments on behalf of consumers. For all credit insurance coverages, reverse competition has caused excessive commissions to lenders – commission amounts that far exceed any reasonable costs incurred by the lenders in selling the credit insurance on behalf of the credit insurer. In many cases, the lender owns the credit insurer and realizes additional profits from very low loss ratios.

Unfair Sales and Trade Practices

In our view, the tremendous profit to producers from the sale of credit insurance has led to numerous instances of unfair and deceptive sales practices by credit insurers and producers over the years. Over the past several years, there have been numerous enforcement actions and lawsuits against credit insurers and lenders for unfair and deceptive sales practices. Credit insurers and lenders have used coercive tactics to force consumers to purchase credit insurance against their will and have deceived consumers into purchasing credit insurance without their knowledge. In addition, many states allow credit insurers to charge credit insurance premiums for amounts greater than the amount borrowed by the consumer, causing consumers to pay excessive premiums.

Another problem found is post-claims underwriting, when the credit insurance is sold to who are ineligible for benefits. The lender sells the credit insurance policy, either knowing the consumer is ineligible for benefits or not bothering to check. The credit insurer is happy to take the premium from consumers ineligible for benefits, but when the consumer files a claim, the credit insurer denies the claim based on eligibility. The result of this arrangement is that creditors and insurance companies keep the premiums paid by ineligible debtors who never file an insurance claim, while refusing to pay on the same policies if claims are ever filed.