Credit Insurance in the Utility Industry: Consumer Protections are Needed Roger Colton Fisher, Sheehan & Colton Public Finance and General Economics Belmont, MA June 2002

Major Types of Credit Insurance b Credit Life: pays off consumer’s remaining debt on a specific loan if borrower dies during term of coverage. b Credit Disability: pays a limited number of monthly payments on a specific debt if borrower becomes disabled during term of coverage. b Credit Involuntary Unemployment: pays a limited number of monthly payments on a specific debt if borrower becomes involuntarily unemployed.

The Use of Credit Insurance b Credit card companies b Auto dealers b Finance companies b Department stores b Furniture stores b Anyone extending credit

The “Loss Ratio” b Considered to be the single most important measure of the reasonableness of credit insurance benefits in comparison to premiums paid. b Loss ratio is the ratio of benefits paid by credit insurers to the premiums paid by consumers for the product.

Loss Ratio: Tests of Reasonableness b NAIC (credit life and disability): 60% b NAIC (unemployment): not yet set b 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 insurance: National data b Credit life: 42% b Credit disability: 49% b Credit unemployment: 13% (individual state experiences similar)

Credit Insurance Overpayments

Credit Insurance: “Reverse Competition” b Credit insurance company sells group policy to lender (called a “producer”) b Lender sells insurance to end user b Lender receives commission on the sale of insurance b Commission is a percentage of the premium. b Higher commissions/higher premiums yield higher producer profits.

Credit Insurance: Unfair Sales Tactics b Over-insured b Packaged insurance b Involuntary insurance

Credit utility insurance: Necessary Consumer Protections b Establish and enforce minimum loss ratios. b Enact effective consumer disclosure requirements. b Enact strong penalties for unfair and coercive sales practices. b Prohibit post-claims underwriting. b Provide consumer choice. b Prohibit disconnection for nonpayment.

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