Credit Property Insurance by State K-P

Kansas

Statutes and Regulations

Creditors may only contract for or receive a charge for insurance against loss or damage to property in an open end credit transaction or if the amount financed, exclusive of insurance charges, is $300 or more and the value of the property is $300 or more. The statute provides three requirements: the insurance must cover a substantial risk of loss or damage to the property; the amount, terms, and conditions of the insurance must be reasonable in relation to the character and value of the property insured; and the term of the insurance must be reasonable in relation to the terms of the credit. The term is reasonable if it is customary and does not extend substantially beyond a scheduled maturity.

Kansas has the least amount of credit property insurance sold per capita of any state. While the prohibition against insuring amounts less than $300 contributes to this result, another factor likely contributing to the small credit property insurance sales is the absence of any provision allowing the sale group policies for property / casualty lines of insurance. Since credit property insurance is typically sold as a group policy to the lender with the lender issuing certificates to the borrower, Kansas law requires individual policies to be issued to borrowers. This requirement may cause some credit property insurers to avoid doing business in Kansas.

Missouri

Statutes and Regulations

Missouri regulates credit property insurance along with all other forms of credit insurance under several sections of their state statutes. Credit property insurance is defined as "insurance against loss of or damage to personal property, covering a creditor’s security interest in such property, when such insurance is written as part of a loan or other credit transaction. . . .," and it cannot "exceed in term the total amount of the indebtedness nor exceed in duration the scheduled term of the underlying contract."

Missouri law requires that credit property insurance be cancelled and unearned premiums be returned when a creditor’s underlying debt is satisfied. This basic consumer protection targets single premium coverage situations in which consumers who pay off the loan early.

Premium Calculations and Rate Standards

The credit property insurance cannot exceed in term the total amount of the indebtedness nor exceed in duration the scheduled term of the underlying contract. Missouri, unlike most states, regulates credit property insurance rates. Rates of $1.85 per $1,000 of indebtedness per month are considered reasonable if the coverage includes "standard fire, extended coverage endorsement, and replacement cost provision endorsement, calculates benefits from data of loss, and provides primary coverage." Insurers may charge higher premiums if the insurer can demonstrate a loss ratio greater than 75%. However, the loss ratio includes creditor compensation, which is capped at 40%. Thus, in addition to excessive compensation to creditors, the Missouri provisions indicate a reasonable loss ratio to be only 35%. The 1995 to 1997 Missouri credit property insurance loss ratio was 29.8%.

Consumer Disclosures

Missouri also has provisions which specifically allow a homeowner’s or renter’s insurance policy with replacement cost endorsement to fulfill a creditors requirement that credit property insurance be purchased. In addition, the following disclosure is required: "You may not need to purchase credit property insurance, and you may have other insurance which this creditor will accept which covers the property securing the loan. You should examine any other insurance you have in order to determine if this coverage is necessary."

While the concept of disclosure is certainly positive and pro-consumer, the Missouri provision highlights some of the problems with disclosures. First, the disclosure is provided in ten-point type size, which is small. Second, the disclosure may be, and is likely, to be included either within a lengthy loan agreement or within a sheaf of papers and, thus, unlikely to be read or even noticed by the consumer. Finally, the typical disclosure, like the Missouri disclosure, does not provide the type of information most likely to prod the consumer into thinking about the value of the product. For example, if a consumer know that, say, 40 cents on the dollar was being paid to the lender and 32 cents on the dollar would, on average, be paid in claims, we suspect more consumers would give a second thought to the purchase of the product.

New York

Statutes and Regulations

A New York statute defines credit property insurance as "insurance against loss of or damage to personal property covering a creditor’s security interest in such property, when insurance is written as part of a credit transaction." The same statute also authorizes the superintendent of insurance to promulgate regulations covering credit property insurance.

New York also has credit property insurance regulations. Debtors are given the option, when credit insurance is required, of using existing equivalent insurance policy, thereby preventing the sale of duplicative coverage in some instances.

Premium Calculations and Rate Standards

Another statute allows credit property insurance to be required, excluding household goods, on loans of $250 or more. The insurance can be written for an amount up to the lesser of the reasonable value of the insured property or the loan principal, and for no longer than the term of the loan contract. There are, two important consumer protections in these provisions. First, household goods are excluded from the items in which security interests can be taken. Household goods are defined as "clothing, furniture, appliances, one radio and one television, linens, china, crockery, kitchenware, and personal effects, (including wedding rings) owned by the consumer and his or her dependents. . ." Second, the $250 minimum prevents consumers receiving small loans from being forced to buy a product they do not need.

The New York credit property insurance regulations requires insurers to file rates that reflect estimated loss ratios of 55%. For the 1995 to 1997 period, the actual New York credit property insurance loss ratio was 31.6%, well below the 55% target.

North Carolina

Statutes and Regulations

North Carolina statutes allow credit property insurance to be written in connection with either any consumer credit installment sales contract or any loan of less than 15 years duration. Credit property insurance is defined as "insurance of the personal household property of the debtor against loss." Personal household property is considered "household furniture, furnishings, and appliances designed for household use . . .." In contrast to the New York definition, the North Carolina definition of household property gives creditors greater opportunity to take security interests in the borrower’s household goods.

Lenders must inform borrowers of the option of providing insurance from other sources if credit insurance is required. While the intention here is sound, a better implementation would be to require lenders to find out if the consumer has alternative coverage and then prohibit the sale of credit property insurance if alternative coverage exists.

Premium Calculations and Rate Standards

North Carolina is unusual in that the statute contains maximum credit property insurance rates. The maximum rates are $.87 per year per $100 of insured value for single interest coverage and $1.31 per year per $100 of insured value for dual interest coverage. These values correspond to $.725 per $1000 per month and $1.09 per thousand per month, respectively. This conversion allows comparison to the Missouri rates of $1.85 per thousand per month and the Alabama rate of $3.00 per thousand per month. North Carolina had one of the highest credit property insurance loss ratios for the 1995-97 period at 39%. However, the credit property loss ratio dropped from over 60% in 1996 to about 26% in 1997.

North Carolina allows a non-refundable origination charge to be added to the cost of each credit property insurance transaction. There is no fee if the insured valued is $250 or less. The fee is $1 for insured value greater than $250 but less than or equal to $500 and $3 for insured value greater than $500. It is unclear if these fees are considered premium for purposes of calculating loss ratios.

Insurers are required to submit detailed premium, exposure and loss experience to the insurance department. While the requirements by individual insurance departments for statistical reporting is not as important now because of the reporting of credit insurance experience to the NAIC in the Annual Statement Credit Insurance Experience Exhibit, more detailed reporting for credit property insurance is necessary and valuable. The availability of information to evaluate credit insurance loss experience, expenses and profits is essential for informed discussion of credit insurance rates and regulation.

Pennsylvania

Statutes and Regulations

Under Pennsylvania statutes, credit insurance is regulated as inland marine insurance. However, Pennsylvania insurance regulations provided for specific regulation of credit property insurance. Credit property insurance is defined as "insurance covering personal property pledged by debtors as collateral to secure a loan or persona property purchased by a credit transaction." Personal property is defined only as property used for personal use, not include mobile homes or motor vehicles.

While both single and dual interest policies may be written, Pennsylvania was alone among the states surveyed in prohibiting borrowers from being charged for single interest coverage. This is a major consumer protection, recognizing that debtors should not be charged for coverage that protects only the lender’s interest. On the other hand, Pennsylvania has no credit property rate regulation.

Premium Calculations and Rate Standards

Regulations limit premium calculation to the cash value of personal property purchased, preventing the sale of coverage in excess of the underlying collateral. Further, credit insurance may not be sold if a borrower has equivalent and valid insurance on the good serving as collateral. If a borrower pays off the debt early, here or she is entitled to a pro rata refund of all insurance premiums.