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Press Release |
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WASHINGTON - In a report released today by Consumers Union and the
Center for Economic Justice, the groups found that credit insurance,
insurance sold in conjunction with a loan or credit, continues to be
a massive rip-off for consumers.
"Credit Insurance: The $2 Billion a
Year Consumer Rip-Off," a report which assesses credit insurance
data on a state-by-state basis, shows that consumers in most states
are paying more than they should under minimum and reasonable rate
standards.
Due to the failure of states to ensure that insurers meet even the
minimum standards for the product, consumers are overcharged by as
much as $2 billion a year. While auto dealers, banks, finance
companies, credit card companies and department stores make
exorbitant commissions to sell the product, consumers continue to get
ripped off by these overpriced products.
The groups looked at the major types of credit insurance, two or
more of which are typically sold in a package. Credit Life which pays
off the loan in the event of death; Credit Disability which pays a
limited number of monthly payments if a consumer is disabled; Credit
Involuntary Unemployment (IUI) which pays a limited number of monthly
payments if the borrower becomes "involuntarily unemployed"; and
Credit Property which pays if there is damage or loss to property
purchased on credit or used as collateral for a consumer loan.
A good indicator of the value of insurance to consumers is the
loss ratio -- the amount paid out in benefits versus the amount paid
by consumer in premiums. The groups found that few states met even
the minimum loss ratio standards for these coverages. The National
Association of Insurance Commissioners (NAIC), the association of
insurance regulators that establishes standards in model laws to
create consistency among states, recommends a 60% loss ratio for
credit life and disability. While the NAIC has failed to establish
any loss ratio standards for credit IUI and property insurance, the
groups recommend a 75% loss ratio for those add-on coverages.
On a countrywide basis, none of the credit insurance met even the
minimum standards in 1997. The average loss ratio for all coverages
was 38% -- consumers were paid 38 cents in benefits per dollar of
premium paid when they should have been paid 60 or 75 cents. The
worst was Credit IUI with a 12.6% loss ratio and credit property with
23.2%. The excess premium charged to consumers in dollars totals just
over $2 billion.
The "Ten Worst" and "Ten Best" List: Based on a comparison of what
consumers paid from 1995 to 1997 versus what they should have paid
had minimum and reasonable standards been met for all types of credit
insurance, the groups found the "ten worst" states were Louisiana,
Mississippi, North Dakota, Alaska, Nevada, Nebraska, New Mexico,
Minnesota, South Dakota and Utah, in that order.
The "ten best" states, where consumers paid the lowest rates
overall, were New York, Maine, Pennsylvania, Vermont, New Jersey,
West Virginia, Rhode Island, Michigan, Puerto Rico and Virginia.
A major reason that credit insurers can get away with this price
gouging is the phenomenon of "reverse competition." Because credit
insurance is sold through lenders, insurers compete by increasing the
commissions and other fees they pay to lenders to sell the product.
Rather than normal competition which decreases prices, "reverse
competition" causes prices to increase. Lenders offer just one policy
on a take it or leave it basis and consumers can't shop around for
the product.
Studies by consumer groups over the years have continually shown
overcharging to consumers for credit insurance. Despite repeated
calls on state legislators, insurance commissioners and the NAIC to
address this problem, the loss ratios continue to get worse. In 1995,
the average for all coverages was 42.5%, in 1996 it was 40.9% and
38.7% in 1997. The remedy is for states to take a new direction and
protect consumers:
· Establish and enforce minimum and reasonable loss ratios (60% for life and disability,75% for IUI and property) and other mechanisms to ensure fair rates;· Prohibit unfair and coercive sales practices, including prohibiting the sale of credit insurance until after the loan has been made;
· Provide meaningful and effective disclosure requirements, including the cost of the coverage and the expected loss ratio;
· Ensure consumer choice by requiring that coverages be sold separately as well as in packages so people aren't forced to buy insurance they don't want or benefit from.
The groups made further recommendations to address the special
problems associated with credit property insurance:
· Limit the premium calculation to only durable personal property so consumers aren't paying for "phantom" coverage on purchases such as food, travel and entertainment;· Restrict credit property sales to purchases over a minimum amount to discourage lenders from "loan packing" or taking a security interest in collateral solely for the purpose of selling credit insurance;
· Ensure that consumers aren't forced to pay for excess insurance by limiting the ability of the lender/insurer to overvalue the collateral, take an interest in non-collateral property or sell coverage for higher than the loan amount.
Mary Griffin of Consumers Union and Birny Birnbaum of the Center
for Economic Justice, who presented the report, advised consumers to
stay away from this product unless they are older, in poor health and
may not qualify for other insurance, or reside in a state with low
rates. Even then, not all coverages will benefit them, e.g., retirees
should not purchase credit unemployment. And, for consumers who have
insurance that would otherwise pay for the losses, e.g., life
insurance or homeowners, credit insurance is not a wise purchase.
TO LEARN MORE: An Executive Summary of the report, including a state-by-state chart, is available on faxback, by dialing 202/238-9258, and requesting document no. 3403.
