Press Release Wednesday, January 10, 2001

Contact: Norma Garcia or Birny Birnbaum 415-431-6747 or 415-533-6747 (cell) Consumers Union's West Coast Regional Office

PROPOSED CREDIT INSURANCE RULES WILL SAVE
CALIFORNIA CONSUMERS NEARLY $200 MILLION EACH YEAR

Consumers Union Applauds Proposal, Urges Commissioner Low
to Strengthen Protections Against Credit Insurance Rip-Offs

SAN FRANCISCO, CA - A proposed set of new regulations now being considered by the California Department of Insurance would save credit insurance consumers in California nearly $200 million each year, according to Consumers Union. The regulations have been drafted by the Department to comply with a law enacted by California lawmakers in 1999 to rein in excessive premiums and questionable sales practices by businesses who offer credit insurance.

"Credit insurance can be a useful product if it is priced right and sold fairly," said Birny Birnbaum, a consulting economist for Consumers Union and Technical Advisor for the Austin-based Center for Economic Justice. "Unfortunately, ineffective insurance regulation has allowed credit insurers to overcharge consumers by hundreds of millions of dollars each year."

"Low-income consumers are often coerced into purchasing expensive credit insurance that offers them little benefit," said Norma Garcia, Senior Attorney for Consumers Union's West Coast Regional Office in San Francisco. "Commissioner Harry Low has the authority and opportunity to curb these abuses and provide real protection for California consumers who deserve value for the insurance premiums they pay."

Credit insurance is sold in conjunction with a loan or credit agreement and may be sold by credit card companies, finance companies, auto dealers, department stores, or wherever loans are made and credit extended for the purchase of personal property. There are a number of different kinds of credit insurance. These policies make payments for the consumer to the lender for a specific loan or credit agreement in the event that the borrower dies (Credit Life Insurance) becomes disabled (Credit Disability Insurance), loses their job (Credit Involuntary Unemployment Insurance) or their property is lost or becomes damaged (Credit Property Insurance).

California lawmakers took action to address credit insurance overcharges following the publication of a Consumers Union report in 1999 that documented that U.S. consumers were overcharged by more than 35 percent based on the loss ratio of the policies issued by insurers. The loss ratio is the ratio of benefits paid by insurers to the premiums paid by consumers for the insurance. From 1995 to 1997 the credit insurance industry nationwide had a loss ratio equal to 40 percent for credit life and credit disability insurance. In other words, for every dollar consumers spent in premiums, they received 40 cents in benefits. This is far lower than the 60 percent loss ratio that the National Association of Insurance Commissioners (NAIC) recommends as the minimum benefit that consumers should expect in relation to premiums paid for such policies.

Consumers Union estimates that California consumers were overcharged by 110% in 1999, the last year for which complete figures are available. During that year, the loss ratio for credit insurance was 28 percent, meaning consumers got 28 cents in benefits for every dollar they paid in premiums. As a result, consumers were overcharged by $232.2 million (see the attached chart). The new law passed by the California legislature requires the Department of Insurance to adopt regulations that sets a minimum loss ratio of 60 percent for companies issuing credit insurance.

Insurers and retail companies typically target low income consumers for credit insurance and sometimes engage in questionable practices to coerce them into purchasing coverage. Some of these tactics include high pressure sales tactics, failure to disclose that the consumer's signature resulted in signing up for credit insurance, and misleading consumers into believing that credit insurance is required for loan approval.

Consumers Union has recommended that the Department of Insurance strengthen the proposed rules by prohibiting many of these practices and by setting an even higher loss ratio for Credit Property and Credit Unemployment insurance.

"These draft regulations go a long way towards protecting consumers from credit insurance rip-offs," said Garcia. "We hope the Department of Insurance will consider strengthening these rules to provide consumers with even more protection and savings."

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Consumers Union, publisher of Consumer Reports magazine, is an independent nonprofit testing, educational and information organization serving only the consumer. We are a comprehensive source of unbiased advice about products and services, personal finance, health, nutrition and other consumer concerns. Since 1936, our mission has been to test products, inform the public, and protect consumers.

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