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Consumer groups accuse credit insurance companies of overcharging

A study by the Consumer Federation of America (CFA) and the Center for Economic Justice (CEJ) claims more than $2.5 billion of the almost $6 billion paid by consumers for credit insurance in 2000 (the latest statistics available) came as overcharges that could have been avoided if state insurance commissioners had followed their own rules.

"A decade ago, CFA reported on the poor value of credit life insurance," says Robert Hunter, director of insurance for the CFA. "Consumers receive even worse value for this insurance today than they did back then."

Credit insurance is typically offered to you when you apply for a new credit card or a loan.

Hunter claims credit insurance companies are increasingly charging too much for the coverage they provide. In 1995 consumers paid almost $1.7 billion in overcharges on credit insurance, according to the report. By 1997 that number had increased to $1.99 billion and by 2000 consumers paid more than $2.56 billion in overcharges.  The CFA and CEJ base their charges on a standard developed by the National Association of Insurance Commissioners, which recommends states require insurance companies to pay a “loss ratio” of 60 cents in claims for every dollar they collect in premiums.   The CFA believes the required loss ratio should be 70 cents.

Loss ratios are a comparison of the amount of money taken in by an insurer in premiums compared to how much is paid out for claims. If a company has a 30 percent loss ratio, that means it pays out 30 cents in claims for every dollar it receives in premiums.

State regulators accused of dropping the ball

According to the CFA/CEJ report, while most states establish minimum loss ratios, many regulators have not enforced those rules.

"Almost half of state insurance regulators have failed to take the most basic steps to protect credit insurance consumers — simply enforcing existing laws and regulations," says Birny Birnbaum, executive director of the CEJ and co-author of the report.

Many state insurance regulators say they would do more to make sure credit insurers are charging fair rates, but limited resources force those states to focus on more serious consumer problems.

The report did praise the states of Maryland, New York, Pennsylvania, South Carolina, Virginia, Maine, New Jersey and West Virginia for enforcing existing loss ratio laws.

The CFA and CEJ say in Maine and New Jersey, credit insurers generally pay 50 to 60 cents in claims out of every dollar received in premiums — a 50 to 60 percent loss ratio.

In 2000, the loss ratio for all types of credit insurance nationwide was 34.2 percent.

Many state regulators say they would do more to enforce loss ratio laws, but claim they have limited resources and are forced to focus on more serious problems facing consumers.

"Credit insurance can be a valuable product to some consumers — if it is priced right and sold fairly," says Birnbaum. "Unfortunately it is seldom priced fairly."

William Burfeind of the Consumer Credit Insurance Association says loss ratios are not an adequate measure of the fairness of a premium rate. Burfeind says states have a mandate to protect companies as well as consumers. "The state has to protect the solvency of insurance companies, so they can't allow an insurance company to charge rates that are too low. If a rate resulting in a 60 percent loss ratio doesn't cover a company's expenses, the company will go out of business," Burfeind says.

The CFA and CEJ are calling on state insurance regulators to force credit insurance companies to cut premium rates.

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