credit insurance in the utility industry: consumer protections are needed roger colton fisher,...
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Credit Insurance in the Utility Credit Insurance in the Utility Industry:Industry:Consumer Protections are NeededConsumer Protections are Needed
Roger ColtonRoger Colton
Fisher, Sheehan & ColtonFisher, Sheehan & Colton
Public Finance and General EconomicsPublic Finance and General Economics
Belmont, MABelmont, MA
June 2002June 2002
Major Types of Credit Major Types of Credit InsuranceInsurance
Credit LifeCredit Life:: pays off consumer’s remaining pays off consumer’s remaining debt on a specific loan if borrower dies during debt on a specific loan if borrower dies during term of coverage.term of coverage.
Credit DisabilityCredit Disability:: pays a limited number of pays a limited number of monthly payments on a specific debt if monthly payments on a specific debt if borrower becomes disabled during term of borrower becomes disabled during term of coverage.coverage.
Credit Involuntary UnemploymentCredit Involuntary Unemployment:: pays a pays a limited number of monthly payments on a limited number of monthly payments on a specific debt if borrower becomes involuntarily specific debt if borrower becomes involuntarily unemployed.unemployed.
The Use of Credit The Use of Credit InsuranceInsurance
Credit card companiesCredit card companies Auto dealersAuto dealers Finance companiesFinance companies Department storesDepartment stores Furniture storesFurniture stores Anyone extending creditAnyone extending credit
The “Loss Ratio”The “Loss Ratio”
Considered to be the single most Considered to be the single most important measure of the important measure of the reasonableness of credit insurance reasonableness of credit insurance benefits in comparison to premiums benefits in comparison to premiums paid.paid.
Loss ratio is the ratio of benefits paid Loss ratio is the ratio of benefits paid by credit insurers to the premiums by credit insurers to the premiums paid by consumers for the product.paid by consumers for the product.
Loss Ratio: Tests of Loss Ratio: Tests of ReasonablenessReasonableness
NAIC (credit life and disability): NAIC (credit life and disability): 60%60%
NAIC (unemployment): not yet setNAIC (unemployment): not yet set Actual loss ratios:Actual loss ratios:
• Group life: 90%Group life: 90%• Group accident: 75%Group accident: 75%• Private passenger auto: 70%Private passenger auto: 70%
Historic loss ratios: credit Historic loss ratios: credit insurance:insurance:National dataNational data
Credit life: 42%Credit life: 42%Credit disability: 49%Credit disability: 49%Credit unemployment: 13%Credit unemployment: 13%
(individual state experiences (individual state experiences similar)similar)
Credit Insurance Credit Insurance OverpaymentsOverpayments
Credit Ins Type Earned Premium Excess Premium
Life $6,556,257,882 $1,956,702,937
Disability $6,955,104,104 $1,208,015,611
Unemployment $2,071,899,892 $1,660,271,645
60% for credit life and disability; 75% for creditunemployment.
Credit Insurance:Credit Insurance:“Reverse Competition”“Reverse Competition”
Credit insurance company sells group Credit insurance company sells group policy to lender (called a “producer”)policy to lender (called a “producer”)
Lender sells insurance to end userLender sells insurance to end user Lender receives commission on the sale Lender receives commission on the sale
of insuranceof insurance Commission is a percentage of the Commission is a percentage of the
premium.premium. Higher commissions/higher premiums Higher commissions/higher premiums
yield higher producer profits.yield higher producer profits.
Credit Insurance:Credit Insurance:Unfair Sales TacticsUnfair Sales Tactics
Over-insuredOver-insuredPackaged insurancePackaged insurance Involuntary insuranceInvoluntary insurance
Credit utility insurance:Credit utility insurance:Necessary Consumer Necessary Consumer ProtectionsProtections
Establish Establish and enforceand enforce minimum loss minimum loss ratios.ratios.
Enact effective consumer disclosure Enact effective consumer disclosure requirements.requirements.
Enact strong penalties for unfair and Enact strong penalties for unfair and coercive sales practices.coercive sales practices.
Prohibit post-claims underwriting.Prohibit post-claims underwriting. Provide consumer choice.Provide consumer choice. Prohibit disconnection for nonpayment.Prohibit disconnection for nonpayment.
