Jerry Kopel


"Legalized thievery" aptly describes what credit insurance companies, credit-granting retailers, and money lenders are doing to Colorado consumers. Using more diplomatic terminology, this appears to also be the conclusion of the Dept. of Regulatory Agencies (DORA) 1996 Sunset report on the Division of Insurance.

"When a consumer purchases goods on credit by borrowing money from a bank or finance company (including using a credit card) the consumer is often solicited to buy credit insurance," states the DORA report "which ensures payment of the debt in the event of death, disability, or some other hardship."

DORA's report continues: "Higher rates cost Colorado consumers millions of dollars a year in overpriced credit insurance." That's because the amount of payout for consumer losses is based on a fixed loss ratio set out in Colorado statutes. For every dollar of credit insurance purchased by Colorado consumers, 40 cents is set aside for expected losses, and 60 cents go into the pockets of the insurers and the agents.

"A comparison of credit insurance rates of other states reveals that Colorado has the LOWEST minimum loss ratio standard in the country", states the DORA report. "While many states require a 60 percent loss ratio standard and some states require as high as an 80 percent loss ratio standard, Colorado's only 40 percent."

DORA recommends the loss ratio standard be raised from 40 percent to 60 percent and calculates the overpriced credit insurance is bilking Colorado consumers of $14 million out of $72 million in yearly premiums. My calculation is $24 million out of $72 million.

Which amount is correct depends on whether you keep the $72 million premium and increase the 40 percent loss ratio of $28.8 million to 60 percent. You then get a $43.2 million payback, a gain of $14.4 million to consumers. But if you keep $28.8 million as the loss ratio, the premium is $48 million, a $24 million cost reduction to consumers.

As stated earlier, "the consumer is often SOLICITED to buy credit insurance." This may actually duplicate insurance coverage the consumer already has. The push by credit grantors on a consumer to "buy" from them puts the consumer under pressure. If consumer says "no", will credit be withdrawn?

Who gets the money? "The seller of the product rather than the consumer chooses which insurer will provide the coverage", writes DORA. These are group insurance policies. "Consequently, insurers compete for credit insurance business NOT by lowering the price to gain consumers but rather by offering higher compensation to the creditor."

The "higher compensation" is in the form of commissions to a creditor or a creditor's key employee as an "insurance agent". "Commissions to sellers of credit insurance within Colorado reach as high as 50 percent" states DORA. It's worth repeating: For each $1 the consumer pays, 40 cents is set aside as loss ratio, the insurance company gets 30 cents and the creditor's employee gets 30 cents.

A 1991 report obtained from the Colorado Dept. of Law indicates nationally "some finance companies establish quotas for the sale of credit insurance which require their employees achieve a specific market "penetration" rate in their sales.

"This leads to sales practices known as "packing" or "sliding". The loan officer arranges necessary loan papers so that the insurance documents are "packed" in between numerous other loan papers. By "sliding" one document after another in front of the consumer for his signature, oral disclosures are avoided. Some consumers do not even know they have purchased insurance."

There are 100 companies authorized to sell credit insurance in Colorado. Not content with making 60 cents of every insurance dollar, some apparently seek to gouge more. The DORA report states "Two years ago (1994), the Division of Insurance (did desk audit) exams of 20 credit insurers...16 were charging higher rates than allowed by statute resulting in thousands of dollars of excess premiums."

One of the 16 credit insurance companies was forced to refund $100,000. Why weren't the other 80 companies reviewed? Based on the 20 reviewed companies, gouging by the 80 unreviewed companies could push the additional loss to consumers yearly to $1 million.

Back in 1967, in a newsletter to constituents I wrote of creditors who owned their own credit insurance companies. "One creditor in Colorado owns a holding company in Arizona, which in turn owns an insurance company in Florida. If you deal with them, they insure your furniture in Colorado against damage by tidal waves."

The National Association of Insurance Commissioners (NAIC) suggests each state adopt a 60 percent loss ratio. A number of states have already done so, and DORA's report agrees that 60 percent is the correct figure for Colorado. Unfortunately, this will not happen.

The problem isn't recent. Thirty years ago in 1966, the interim committee on Financial Institutions voted unanimously to adopt the NAIC model bill on credit insurance, It was introduced in 1967 by then-Democrat Rep. Ken Monfort as HB 1016, sent to House Business Affairs where, under pressure from lobbyists, it died a quiet death, never once leaving the Republican chairman's pocket for even a discussion of its merits.

In 1991, the Sunrise-Sunset Committee considered revision of the statutes governing the Insurance Division. Credit insurance was far down the list, No. 53 out of 53 recommendations and only suggested putting all forms of credit insurance under Article 10 of Title 10.

The Insurance Division bill was SB 90, carried by Sen. MaryAnn Tebedo and Rep. David Owen in 1992. The new law placed all credit insurance under CRS 10-10, kept the 40 percent loss ratio and in ADDITION removed statutory language limiting commissions.

In response to an attempt I made during House floor debate on SB 90 to raise the loss ratio to 50 percent, then-Insurance Commissioner Joanne Hill promised me and others the Insurance Division would get legislation introduced in 1993 to get the ratio raised to 50 percent. It never happened.

Insurance Division regulations adopted following passage of SB 10 make it clear that if the creditor adds credit insurance as part of the debt, "the loaned premium will be deemed collected for the insurer as soon as it is added to the indebtedness." So cost of the credit insurance is ADDED to the debt, spread out and repaid under the same high interest rate as the original debt, and premiums are paid to the insurance company and the insurance agent immediately.

DORA director Joseph Garcia and authoring analysts Christopher Flanagan and Geoffrey Hier very credibly spelled out the problem in their Sunset report. Credit insurance revision jumped from No.53 in 1991 to No.4 in 1996. And under the 1996 version of the Sunset law, the 19 DORA recommendations will be drafted into a bill, heard probably by Senate Business Affairs, and Senate President Tom Norton will designate the chief sponsor.

Since the most influential state lobbyists are already on the payroll of the firms and persons who benefit from this legalized thievery, Garcia, Flanagan and Hier will see their work on credit insurance deleted almost immediately.

Their only hope, and it is a FAINT one, is for Gov. Romer to veto any bill that doesn't contain the new loss ratio. That doesn't wipe out the Insurance Division. Even though the Sunset repealer in the present statute takes "effect" July l, 1997, the division continues until July l, 1998. But pressure in 1998 would be on the insurance companies to get the bill passed and not vetoed again.

Under the McCarran-Ferguson Act of 1945, the federal government steps in to regulate insurance when a state fails to regulate. The last thing these companies want is to have the federal government step in. They are much more likely to agree to correct consumer abuses when faced with that scenario.


Jerry Kopel writes a column for the Statesman based on 22 years past experience as a state legislator. A future column will review other DORA recommendations regarding the Division of Insurance.

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