Credit%20Insurance%20in%20the%20Utility%20Industry:%20Consumer%20Protections%20are%20Needed

1
Credit Insurance in the Utility
IndustryConsumer Protections are Needed

• Roger Colton
• Fisher, Sheehan Colton
• Public Finance and General Economics
• Belmont, MA
• June 2002

2
Major Types of Credit Insurance

• Credit Life pays off consumers remaining debt
  on a specific loan if borrower dies during term
  of coverage.
• Credit Disability pays a limited number of
  monthly payments on a specific debt if borrower
  becomes disabled during term of coverage.
• Credit Involuntary Unemployment pays a limited
  number of monthly payments on a specific debt if
  borrower becomes involuntarily unemployed.

3
The Use of Credit Insurance

• Credit card companies
• Auto dealers
• Finance companies
• Department stores
• Furniture stores
• Anyone extending credit

4
The Loss Ratio

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

5
Loss Ratio Tests of Reasonableness

• NAIC (credit life and disability) 60
• NAIC (unemployment) not yet set
• Actual loss ratios
• Group life 90
• Group accident 75
• Private passenger auto 70

6
Historic loss ratios credit insuranceNational
data

• Credit life 42
• Credit disability 49
• Credit unemployment 13
• (individual state experiences similar)

7
Credit Insurance Overpayments
8
Credit InsuranceReverse Competition

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

9
Credit InsuranceUnfair Sales Tactics

• Over-insured
• Packaged insurance
• Involuntary insurance

10
Credit utility insuranceNecessary Consumer
Protections

• Establish and enforce minimum loss ratios.
• Enact effective consumer disclosure requirements.
• Enact strong penalties for unfair and coercive
  sales practices.
• Prohibit post-claims underwriting.
• Provide consumer choice.
• Prohibit disconnection for nonpayment.

11
For more information

• roger_at_fsconline.com