Jerry Kopel


"Higher rates cost Colorado consumers millions of dollars a year in over-priced credit insurance." Oct. 15, 1996 report by the Dept. of Regulatory Agencies to the Colorado legislature

Sen. Bob Martinez (D) has done what no other legislator in Colorado has ever managed to do: Get a bill saving Colorado consumers millions of dollars from overpriced credit insurance policies out of one Colorado legislative body, the Senate, into the House.

The Dept. of Regulatory Agencies (DORA) had urged the legislature to raise the loss ratio on credit insurance (the amount paid back to insured consumers) from the present 40 percent, to 60 percent. This was part of DORA's overall Sunset Review of the Insurance Division. But the suggested change didn't sit well with companies and individuals who, over decades, have made hundreds of millions in excess profits.

"When a consumer purchases goods on credit by borrowing 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 disability, death, or some other hardship." Retailers, such as car dealers, also sell credit insurance.

The amount paid back to consumers is based on a fixed ratio set out in CRS 10-10-109(2). For every dollar of credit insurance bought by Colorado consumers, 40 cents is set aside for expected losses (loss ratio) and 60 cents goes into the pockets of the insurers and the agents.

"Commissions to sellers of credit insurance within Colorado reach as high as 50 percent" states DORA. So for every $1 spent by a consumer, the insurance company gets 30 cents and the creditor's employee (often the CEO) who is the "insurance agent" gets 30 cents.

Well, doesn't the free market enable the consumer to buy credit insurance at the lowest price? No. DORA states "The seller of the product rather than the consumer chooses which insurer will provide the coverage". These are group insurance policies. "Consequently, insurers compete for credit insurance NOT by lowering the price to gain consumers but rather by offering HIGHER compensation to the creditor."

Can't the consumer just say "no" to credit insurance? Because it is such a major profit maker, DORA states "the consumer is often SOLICITED to buy credit insurance" even though it might duplicate insurance coverage the consumer already has.

Please substitute "pressured" for "solicited". A 1991 report obtained from the Colorado Dept. of Law indicates nationally "Some finance companies establish quotas for the sale of credit insurance requiring their employees achieve a specific market "penetration" rate in their sales.

How much money is involved? The DORA report used premiums written in 1994 and found $72,437,620 of credit insurance, covering life, accident and health, involuntary unemployment, and property. At 40 percent, the payback to consumers would be $28.9 million. The insurance companies and insurance agents keep $43.5 million.

If you raise the loss ratio to 60 percent, you are not going to get a larger "payback". The $28.9 million represents ACTUAL losses. What WILL happen is the amount of premium paid is reduced. If the total premiums paid was $48 million, a 60 percent return would be $28.8 million. That means the EXCESS premiums paid by Coloradans for credit insurance in 1994 was $24.4 million.

DORA also found a number of the credit insurance companies charging even more than permitted by law. "Two years ago (1994) the Division of Insurance exams of twenty credit insurers (found) sixteen were charging higher rates than allowed by statute resulting in thousands of dollars of excess premiums." One of the 16 companies was forced to refund $100,000. A subsequent DORA document indicated one of the 16 companies only returned 2 cents for every $1 paid.

So it is easy to understand why major lobbyists representing groups that make millions in excess profits will do their level best to stop Sen. Martinez.

Two days before the 1997 legislature convened, the Senate Business Affairs Committee under chairman Dave Wattenberg (R) met to hear from DORA on the Insurance Division report, and from the Insurance Division and lobbyists opposed to the 60 percent credit insurance payback.

Insurance Commissioner Jack Ehnes testified that "Colorado is sitting out there like a sore thumb." He was referring to a statement in the DORA Insurance Division report showing "Colorado has the lowest minimum loss ratio standard in the country."

Lobbyist Cathy Walsh of Colorado Legislative Services, Inc. with a memorandum from Colorado Bankers Assn., Colorado Automobile Dealers Assn., Financial Services Assn., Colorado Retail Council, Consumer Credit Insurance Assn., and Central States of Omaha, responded that a 40 percent loss ratio was appropriate, that Colorado was "in the middle of the pack", and 40 percent was needed to ensure Colorado consumers were able to get credit insurance.

Not every money lender agrees with Ms. Walsh. Credit unions in Colorado presently DO provide a 60 percent loss ratio for credit insurance. And Commissioner Ehnes pointed out "Maine has an eighty percent loss ratio, with ten companies providing credit insurance and no problem of availability of credit insurance." As to Ms. Walsh's comment that Colorado was "in the middle of the pack" a recent DORA rebuttal document asserts:

"Eight states have credit life insurance rates that exceed or are 60 percent. ALL OTHER STATES are between 50-55 percent for credit life. Colorado is at 40 percent. Eleven states have credit accident and health insurance that meets or exceeds the 60 percent loss ratio requirement. ALL OTHER STATES except Colorado are at 50 or 55 percent. Colorado is at 40 percent."

The Senate Business Affairs Committee approved the recommendation to raise the loss ratio from 40 to 60 percent on a 4 to 3 vote. The proposal at that point was part of a larger bill (draft bill B) continuing the Insurance Division until the year 2002.

Sen. Wattenberg voted against the loss ratio hike, and used his authority under the 1996 revision of CRS 24-34-103, to separate draft bill B into a number of measures. He assigned the loss ratio recommendation as a separate bill (SB 103) to Sen. Bob Martinez (D). The major part of the Insurance Division continuation (SB 108) went to Sen. Rob Hernandez (D). Under CRS 24-34-103, House Speaker Chuck Berry chose Rep. Paul Schauer (R) as House sponsor of SB 108.

The Martinez measure, as expected, was killed in Senate Business Affairs on a 6 to 3 vote. Sen. Martinez waited until SB 108 was before the Senate on second reading and successfully offered SB 103 as an amendment to SB 108. He worked the Senate floor to avoid an amendment to the Committee of the Whole report by Sen. Bill Schroeder (R). SB 108 passed the Senate on third reading with eleven "no" votes by Republicans.

Rep. Paul Schauer was overheard commenting that SB 108 was like a Christmas tree with "all the added amendments", making it clear the Martinez amendment would be killed in the House. SB 108 was assigned to House Business Affairs, which he chairs, and then to Appropriations Committee.

SB 108 passed the House with the credit insurance amendment deleted and the bill was then reapproved in the Senate as amended in the House despite efforts by Sen. Martinez to avoid that result.

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