Credit Property Insurance by State A-F

Statutes and Regulations

Alabama statutes permit creditors to require credit property insurance. However, if insurance is required, consumers must be given "written notice of the option of obtaining such insurance through a person of the debtor’s choice." The statute also provides "The premium or premiums charged for such required insurance shall not exceed the premium approved by the administrator or the rates filed by the insurer with the Alabama Department of Insurance."

Alabama also has a credit property insurance regulation. Section 6(A), entitled "Consumer rights," states that "The consumer shall not be required or coerced to obtain insurance from any particular insurer nor through any particular agent or representative as a condition to obtaining a loan." This provision is important for consumers because it allows consumers to seek specific legal redress, instead of having to find a more general statute or regulation to sue under and may, therefore, cause creditors to be more careful in their sales practices.

Premium Calculations and Rate Standards

The Alabama statute includes the basic consumer protection that the insurance "shall not exceed the approximate amount and term of the credit," but fails to limit credit property coverage or premium calculations to net principal amount. The strongest provision of the Alabama statute is the prohibition against the sale of credit property insurance unless the "original amount financed or original principal exclusive of the charges for insurance is $300.00 or more and the value of the property is $300.00 or more." Establishing a minimum property value for the sale of credit property insurance does help to prevent the sale of unnecessary insurance to consumers who obtain small loans. However, any minimum amount represents a target for insurance packing schemes.

The Alabama credit property regulation establishes both prima facie rates and loss ratio standards. Premium rates cannot exceed $2.35 per $1,000 of indebtedness per month for dual interest coverage, with an additional charge of $ .65 per $1,000 of indebtedness per month if theft coverage is included. The regulation also requires rates for single interest coverage not be greater then 67% of the dual interest rates.

The regulation allows rates to exceed the standards if an insurer can "demonstrate that its rates produce or may reasonably be expected to produce a loss ratio of at least fifty percent." While the 50% loss ratio is a low standard, few states achieve even this low threshold. Table 4 shows that Alabama had a average loss ratio of 48% for 1995 through 1997 – not only close to the state’s loss ratio target, but also one of the highest loss ratios for credit property insurance among the state. Alabama loss ratios for "other" credit property insurance were low, however – averaging under 15% for 1995 to 1997 period

California

Statutes and Regulations

The California Insurance and Finance Codes have credit insurance provisions, but neither apply to credit property insurance. Credit insurance, other than credit life and credit disability insurance, is specifically exempted from the prior approval requirements of Proposition 103.

Premium Calculations and Rate Standards

The California Finance Lenders Law does state that "The amount of insurance required by the licensee to protect its security interest shall not exceed the lesser of the principal amount of the loan or the replacement value of the security as determined by the insurer." This provision seems to prohibit the sale of credit property insurance for non-covered goods, which is otherwise a common situation.

Insurers may file and use credit property insurance rates. The statute requires that rates not be excessive, inadequate, or unfairly discriminatory.

Colorado

Statutes and Regulations

The Colorado statute governing credit insurance in general includes credit property insurance. A creditor may not require credit insurance on an open-end account. If required on a closed-end account, the debtor may request the option of furnishing the insurance through existing policies or procuring the insurance through another insurer. Colorado also has a credit insurance regulation which specifically addresses credit property insurance.

Premium Calculations and Rate Standards

The amount of the insurance may not exceed the total amount repayable under the contract. Forms must be filed and the Commissioner must disapprove the form if the benefits are not reasonable in relation to the premium charged. The form is presumed reasonable if the rate is reasonably expected to produce a ratio of incurred claims to earned premium of not less than 40%.

The credit property regulation requires that, for single premium coverages, the premium must be based on the lesser of the purchase price or original amount of indebtedness and must be based on purchase of durable goods only and may not include the cost of any service, meals, entertainment, or any other non-durable item. While the limitation of premium calculations to durable goods is an important consumer protection, this regulation does not include the requirement for open-end, or credit card loan coverages. It is precisely the credit card loan coverages that are the most susceptible to the phantom coverage problem.

The Colorado regulation has fairly extensive requirements for rate filings. The rate filings must "conclusively demonstrate compliance with the loss ratio standard and must be certified by a qualified actuary." Rate filings must be accompanied by adequate supporting documentation, including, at a minimum, three years of premium and loss experience and demonstration of compliance with the loss ratio standard.

While there are prima facie rates for credit life, credit disability and credit unemployment coverages, no prima facie rates are promulgated for credit property insurance. However, if the cumulative three-year loss ratio falls below the minimum loss ratio standard, the insurer must "promptly file adjusted rates that can be prospectively expected to produce a loss ratio greater than or equal to the minimum standards, or submit reasons acceptable tot he Commissioner as to why it should not be required to do so. The regulation also provides that in certain circumstances the Commissioner may require corrective actions, including a rate decrease such that within the following two calendar years, the cumulative five-year loss ratio meets the minimum standard; payment of a settlement equal to 110% of the excess premium collected; or voluntary suspension of credit insurance sales.

The Colorado statutes and regulations are unique in several ways. First, while the 40% target loss ratio for credit property insurance does not seem like a large hurdle, it is certainly far higher than many credit property insurers achieve in most other states. Second, the actions envisioned in certain situations where the insurer does not achieve the minimum loss ratio depart from prospective ratemaking procedures and require insurers to essentially pay back overcharges. Colorado had one of the highest credit property loss ratios for the 1995-1997 period at 44.2%, but the loss ratios have dropped from 1995 to 1997. The 1997 credit property loss ratio was 34.1%.

Florida

Statutes and Regulations

In Florida, credit property insurance is defined under the heading of casualty insurance, as " . . . a limited line of insurance providing coverage on personal property used as collateral for securing a loan or on personal property purchased under an installment sales agreement." Florida also has a regulation addressing credit property insurance.

Premium Calculations and Rate Standards

The statute specifies that "The coverage shall be issued on an inland marine policy form, and coverage limits shall be restricted to the initial amount of the loan or the amount of the installment sale. A Florida regulation emphasizes this point, stating that premiums for credit property insurance can be charged "only on the actual cost of the property and any sales tax thereon." The regulation then adds that "finance or service fees, loan interest, delivery charges and other insurance premiums" are excluded from the total on which insurance premiums can be charged.

Credit property insurance rates are governed by general standards that rates will be approved unless they are excessive, inadequate or unfairly discriminatory. No target loss ratios are provided. The 1995 to 1997 Florida credit property loss ratio of 24.7% suggests that the general rate standards are not adequate for ensuring fair rates for consumers.