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Consumer Credit Regulation: 6.3.2.3 Creditor Receives Interest on the Premium

Creditors often finance the consumer’s credit insurance premium and gain additional interest revenue on such financing. If the purchase of the credit life or credit accident and health insurance is voluntary, or if the borrower has a choice of providers on required property insurance on collateral, the Truth in Lending Act and most state credit laws108 permit the cost of the premium to be included in the principal or amount financed.

Consumer Credit Regulation: 6.3.3.1 Low Loss Ratios Demonstrate Excessive Cost

That credit insurance is overpriced can be demonstrated by reviewing credit insurance “loss ratios,” the percentage of incurred insurance claims to net premium dollars. In other words, if an insurer has a 35% loss ratio, then 35% of each premium dollar is paid out to insureds for claims. The other 65% is retained for the insurer’s expenses and profit and the creditor’s compensation.

Consumer Credit Regulation: 6.3.3.2 Reverse Competition; Market Failures

The extremely low loss ratios for lines of credit insurance without price regulation, and even the low loss ratios for insurance lines where the price is regulated can be explained by the phenomenon of reverse competition. The National Association of Insurance Commissioners Credit Personal Property Model Law provides a definition and description of reverse-competitive markets:117

Consumer Credit Regulation: 6.3.4.2.1 Decreasing term credit life insurance

Credit life pays off an outstanding obligation in the event of the borrower’s death. The most commonly sold type of credit life is decreasing or declining term credit life insurance. “Decreasing term” means that the amount of coverage decreases as the balance on the loan declines because of the installment payments. Theoretically, the benefits payable in the event of death will cover only the outstanding balance on the loan at the time the death occurs.123

Consumer Credit Regulation: 6.3.4.2.2 Level term credit life insurance

The second type of credit life insurance is level term credit life insurance, where the amount of coverage or benefits payable does not decrease despite the fact that the installment payments reduce the account balance. The benefits payable remain level over the entire term of the policy.

Consumer Credit Regulation: 6.3.4.2.3 Joint and single credit life insurance and term limits

Single credit life protects only one named debtor. Joint life protects two debtors who are obligated on an account. Most often, joint life is sold where two spouses are both obligated on an account. Joint coverage, however, means only that the policy will pay if either borrower dies. If both borrowers die, there are no additional benefits. The premium rate for joint life is more expensive than single life.

Consumer Credit Regulation: 6.3.4.3 Credit Disability/Accident and Health

Credit disability insurance developed later than credit life insurance, but in much the same manner and for the same purpose. Creditors were looking to borrowers’ wages to repay debt; death and disability are two major unforeseen circumstances that could interrupt wages. The purpose of credit disability insurance is to ensure that payments on a loan or credit sale will still be made should sickness or accident cause a significant unanticipated interruption in income.

Consumer Credit Regulation: 6.3.4.4 Involuntary Unemployment Insurance

Loss-of-income or involuntary unemployment insurance is aimed primarily at loss of income caused by layoffs, though some policies will also make monthly payments on a credit account if, in certain circumstances, the borrower goes out on strike or is fired. Unemployment insurance may be sold separately, or in combination with credit disability coverage. This combination coverage may raise special cost and voluntariness questions which should be explored.131

Consumer Credit Regulation: 6.3.4.5 Credit Personal Property

Credit personal property insurance insures against loss of the collateral on a loan, either property purchased with the loan or property pledged to repay a loan. However, it is not unknown for credit personal property insurance to be written on property unrelated to the loan, or for coverage to be written in amounts greater than the loan, despite the fact that this practice may be illegal in many states.137 Other times, the coverage may be very limited, such as loss caused by fire or lightning after repossession.

Consumer Credit Regulation: 6.3.4.6 Non-Credit Insurance Distinguished

Creditors may offer to sell ancillary insurance, unrelated to the debt itself. This insurance does not protect the creditor against any risk relating to the account, unlike credit insurance, where the beneficiary is the creditor or the debtor’s account. However, the creditor will finance the premium for this “separately” purchased product. The creditor may sell cancer insurance, accidental death and dismemberment insurance,140 or level term non-credit life insurance (in addition to the credit life).

Consumer Credit Regulation: 6.4.1 Introduction

State insurance departments regulate the conduct of insurers in selling credit insurance. State banking agencies or other state regulators have authority concerning a creditor’s offer of credit insurance. Federal regulators, primarily the Consumer Financial Protection Bureau, may also regulate creditor actions involving credit insurance.

Consumer Credit Regulation: 6.4.2.1 General Restrictions

State credit statutes—such as small loan acts, consumer loan acts, industrial loan acts, second mortgage laws, or general credit statutes, including retail installment sales acts—may contain important limitations on the creditor’s sale of credit insurance.143 Unlike most credit insurance codes, credit and licensing statutes often provide viable consumer remedies for violations.

Consumer Credit Regulation: 6.4.3 Insurance Premium Financing Laws

Insurance premium financing laws do not regulate the sale of credit insurance, even though that sale is financed as part of the loan it insures. Instead, these laws regulate the financing of ordinary insurance premiums, often allowing high interest rates on these transactions, which are actually credit sales.

Consumer Credit Regulation: 6.4.4 Introduction to Insurance Regulation of Credit Insurance

Most state insurance codes devote specific chapters to credit insurance. The majority of these are based on the Model Credit Life, Accident and Health Insurance Act, developed by the National Association of Insurance Commissioners (NAIC) in 1960.175 Even where that Act is not specifically adopted in a state, the Act often influences the substance of the state’s credit insurance regulation.176

Consumer Credit Regulation: 6.4.5.3 State Licensing Requirements

State insurance laws often require that the insurer obtain a certificate of authority or license before soliciting insurance applications or transacting insurance in the state or from offering insurance in other states from an office in that state.207 If the insurer does not obtain the necessary permission from the state insurance agency to operate, the insurance contract may be void.208

Consumer Credit Regulation: 6.4.6.1 General

Most states have a prescribed mechanism for establishing authorized rates for credit life and disability insurance, but most states do not do so for credit personal property and credit involuntary unemployment insurance (IUI). Credit personal property and credit IUI rates are more typically subject to department review and approval or department review and disapproval—depending on the regulatory structure (prior approval, file and use, etc.). Consequently, this discussion relates primarily to credit life and disability rates.

Consumer Credit Regulation: 6.4.6.3 Deviations

As the term indicates, the prima facie rate is a presumptive standard of reasonable benefits. An insurer may request that the insurance department grant an “upward deviation,” which then allows it to charge a higher premium. Theoretically, the insurer must present actuarial evidence to the department to establish that the prima facie rate is insufficient. Only a few states have mandatory downward deviations if the rates charged do not meet the benchmark loss ratio.220

Consumer Credit Regulation: 6.4.6.4 Challenging Prima Facie Rates

The NAIC Model Act specifies in mandatory terms that the insurance commissioner require rates that are reasonable in relation to benefits. Therefore, a commissioner who has authorized prima facie rates which result in loss ratios lower than the state’s target benchmark loss ratio may be vulnerable to a mandamus challenge from consumers. This rarely has been done, though consumers were ultimately successful in Ohio and Illinois when this approach was tried.224

Consumer Credit Regulation: 6.4.6.5 Filed-Rate Doctrine

Where insurance companies (or other entities) file and seek approval for their rates from a state regulatory body, the filed-rate doctrine233 requires courts to accord state administrative and regulatory bodies deference regarding approved rates.234

Consumer Credit Regulation: 6.4.7.1 UDAP Statutes

Every state has a state deceptive practices (UDAP) statute that typically provides strong remedies and attorney fees for any unfair or deceptive act or practice.242 UDAP statutes usually are well suited to challenge credit insurance abuses,243 but some state statutes exclude credit or insurance transactions from their coverage, or find that a state’s regulation of unfair insurance practices prevents a private UDAP claim.244