Resuscitating credit life: banks' new debt-protection products have cut into the credit insurance market, but credit insurers are finding ways to cope. (Life/Health).

Credit insurance has been hard to sell in recent years, and insurers see little prospect for future growth. Now a new kind of banking product is beginning to cut into sales even more.

The new products, issued by federally chartered lending institutions, cancel borrowers' debt, make payments on debt or defer those payments. They serve the same purpose as credit-life, credit-disability and credit-unemployment insurance, but they are much easier for financial institutions to sell.

Sold through banks, savings and loans and credit unions, credit insurance began to lose its appeal more than a quarter century ago. Credit-life sales have been stagnant since 1975, even as consumer-installment debt has burgeoned nearly sixfold, according to the CreditRe Corp., a managing general underwriter and consulting firm in Hurst, Texas. The company said that net written premiums for credit life have remained in a narrow range of about $1.5 billion to $2 billion-plus annually while consumer-installment debt has exploded to more than $1.3 trillion in 1998 from about $220 billion in 1975. Premiums fell sharply to $2.05 billion in 2001 from $2.35 billion in 2000, according to A.M. Best Co. data.

Lending institutions may see their new debt-protection products as a way of reinvigorating those flat credit-insurance sales. Insurers cannot offer the new products, but they are repositioning themselves in two ways, said Bill Burfeind, executive vice president and treasurer of the 140-member Consumer Credit Insurance Association, based in Chicago. One is as administrator of the product since it is similar to servicing credit insurance. The other is by writing the contractual liability insurance policy that backs up the risk banks may be taking, should banks wish to buy the insurance.

Debt-cancellation and debt-deferment products appeared about four years ago in the bank market, but "came into vogue" in the past year, said Claudia Ormrod, the association's chairwoman. In addition to repositioning themselves around the banking products, insurers are trying to design a more competitive insurance product. "We're trying to expand benefits and combine coverage options to provide as good a value for consumers as we can in states in which we do business, but it's hard to be innovative with credit insurance, since the laws of each state are so restrictive," she said.

That is not a problem with debt-cancellation or debt-deferment products, because they are under the jurisdiction of the federal banking regulators, not individual state departments of insurance. The Office of the Comptroller of the Currency regulates national banks; the Office of Thrift Supervision regulates savings and loans; and the National Credit Union Administration oversees credit unions. Ormrod said the authority to write the products is "murky" for state-chartered banks without parity statutes and non-bank financial-services companies. "The only alternative for those entities is to continue to offer credit insurance, which should make our products' outlook less dim," she said.

The banking institutions like the new debt-protection products for reasons other than simpler regulation. These products cut Out insurers as contractual third parties, leaving only the lender and borrower. Bank employees need not have insurance licenses to sell the products. Product designs need not be state specific, but rather can be customized to fit the needs of bank clients; a lender could sell the same product across the nation.

The new products also may take banks out of the line of fire of consumer groups. "Credit insurance can be a valuable product to some consumers if it is priced right and sold fairly," said Birny Birmbaum, director of the Center for Economic Justice in Austin, Texas. "Unfortunately, it is often overpriced. As a consequence, consumers have been subject to often unfair and coercive sales practices."

Birnbaum said he has seen some improvements in the past couple of years. The National Association of Insurance Commissioners passed a credit-insurance model act and sent a bulletin to the states to encourage them to do more to improve the situation, he said. Several states have lowered rates insurers may charge, he added, including Indiana, Ohio, California and Maryland. "And we've seen that credit insurance sold with credit cards has almost disappeared at the big banks because of the debt-cancellation products," he said. "What's sold today in credit insurance is almost completely on installment loans."

But Birnbaum said he is not yet a fan of debt-protection products. "They have the potential to be better, but currently, they're a much worse value for consumers," he said. "There are no minimum standards for benefits and no oversight of pricing. There is some regulation; the comptroller recently promulgated a rule potentially oriented toward disclosure and the prohibition of tying." Tying is the practice of telling borrowers they must buy insurance or debt protection to get a loan.

Birnbaum also cited evidence that loss ratios on debt-protection products may be even lower than for credit insurance, which consumer groups have attacked for their low loss ratios. Birnbaum said regulators consider loss ratios of 50 to 60 as reasonable, but that he estimated a loss ratio for a debt-protection product recently issued by a big bank at less than five.

Pros and Cons

Richard McMillan, a senior financial analyst at A.M. Best Co., said credit life insurance has been under pressure from consumers and regulators because it has much higher rates than ordinary life insurance. Regulators have mandated rate rollbacks, he said.

Despite its problems, the credit life market also has some virtues, McMillan said. "It's not the best buy out there, but it might be the only insurance people in lower socioeconomic groups have," he said. "It might be a bad buy until they become disabled and it makes payments on their cars." He also pointed out that consumers can buy credit life without underwriting.

The CUNA Mutual Group, Madison, Wis., lists other advantages of credit insurance: It's easy to buy, rates typically don't vary with age, gender, health habits or other factors, and there are no policy fees. Such fees on term life insurance can equal the entire annual cost of credit life insurance. Also, small amounts can be insured since the amount of insurance matches the loan. Even small term life policies have face-amount minimums of $50,000, while CUNA Mutual's average credit policy insured about $7,500 in 2001.

In November 2001, the Consumer Federation of America and the Center for Economic Justice released a report stating that consumers of credit insurance were overcharged about $2.5 billion in 2000. They based their calculation on the NAIC's recommendation of a loss ratio of 60 as a minimum consumer benefit.

Credit unions were the only financial institutions that met or surpassed that mark in their credit insurance lines. The CUNA Mutual Group provides 75% of credit insurance issued through credit unions, and it had a combined credit life/credit disability loss ratio of nearly 64 in 2000.

CUNA Mutual has bucked the industry trend of declining credit-insurance premiums in recent years. It has ranked second in premiums over the past five years and increased its market share of credit life insurance in 2001 to about 11%. "We've focused on member needs and offering a good return," said Rich Fischer, vice president, credit insurance products. "If you're doing business in the right way, you'll continue to grow."

CUNA Mutual is also helped by its niche position in the credit-union market and the fact it insures all kinds of needs in the credit-union market. "It equates to loyalty and a good partnering arrangement," Fischer said. "We jointly take care of the credit unions and their members. They are our lifeblood."

Fischer said the outlook is "pretty dim" for credit insurance industry-wide, based on what he has been reading on the topic. "In the next few years, indications are credit insurance will be in a run-off mode in other sectors of the industry," he said. "However, we expect it to remain a viable form of protection in the credit-union marketplace. We feel it still provides a significant value to credit unions and members, and we expect to be in this business for a long time to come."

Still, CUNA Mutual began working in summer 2001 to help a large credit union develop a credit-union debt-cancellation product, and Fischer said CUNA Mutual is no longer developing new credit-life products. He also said the company expected the amount of its credit-insurance premiums to fall in 2002 but that the company is doing "everything in its power to overcome that" and resume growth in the product line.

Fischer disputed Birnbaum's assessment about debt-protection products being poor values due to a lack of minimum-benefit standards and no oversight of pricing. "I can understand why he makes statements like that, but regardless of the regulations, you still need to provide a good, solid product for the person buying. If you have a solid product and full disclosure, people will decide whether they want to buy it."

Working With Credit Unions

The product CUNA Mutual helped design became the first credit-union debt-cancellation product, Fischer said. It can be customized to meet the needs of a variety of employee groups within the credit union. For example, classes of employees have different benefit plans that pay when they are on furlough. "That's a real key of the flexibility of the debt-cancellation approach," he said. Debt-cancellation benefits then can begin at varying times during the furlough to meet the needs by coordinating with the employer-benefit plans, and employees can choose whether their plan would cover monthly loan payments, interest only, or whether it would provide them a deferral period during which they don't have to make payments.

Fischer agreed that debt-protection products are simpler than credit insurance on several levels. For example, a single product across all 50 states, one set of regulations, and one guiding principle to follow add simplicity, but he said the ability to customize the product might make it more complex than credit insurance. "You can tailor the product to each financial institution. There's just a lot more diversity allowable in product design. That's one of the real positives for the lending institutions. You can, in fact, much better meet the needs of their members."

The biggest writer of credit insurance in the United States is the Atlanta-based Assurant Group, which is part of Fortis Inc. In 2002, it will write about $1.8 billion in credit insurance covering life, disability and unemployment, said President Bruce Camacho. But Assurant's clients--big financial institutions--have switched to debt-deferment programs, and the company's credit-insurance business is mostly in a run-off that Camacho estimates will take from five to 10 more years.

The looming demise of credit insurance will not financially hurt Assurant, however, because it has become the nation's largest third-party administrator of debt-protection products. Camacho said Assurant holds a 52% market share in the business; 31% of banks in the United States handle the administration themselves, while Berkshire Hathaway affiliate Central States Health & Life Company of Omaha holds about 11% of market share. Assurant and its predecessor companies have had business relationships with financial institutions for more than 50 years.

"We change with the market, and we'll change again if it's necessary," said Camacho. "We saw the opportunity coming about four years ago. Most of what we do for debt protection is the same as we do for credit insurance." Customer services include billing, activation of benefits, fielding of inquiries, information processing and payment of claims. The actual selling of the product is also easier for Assurant, which conducts sales on behalf of most of its clients, and for the clients themselves, he said, given that they no longer have to deal with the "regulatory quagmire" of rules and regulations from 50 different states.

Reserves and Regulation

Administering debt-protection products also lessens Assurant's need for capital reserves, Camacho said. Assurant still keeps reserves to cover insurance it writes for banks on their debt-cancellation risk, which pays off debt if a bank customer dies. Most of the banks assume the risk for their debt-deferment products, which make payments on loans if a customer becomes disabled or unemployed, he said.

Elsewhere in the world, where regulation does not pose the problems it does in the United States, Assurant's credit-insurance business is thriving. It is selling credit insurance "like gangbusters" in Canada, where premiums have grown 30% to 40% in recent years, and in the United Kingdom, said Camacho. It is building a business in Latin America, primarily in Brazil, Argentina, and through a joint venture in Mexico. Assurant is also writing credit insurance in continental Europe and through joint ventures in south-east Asia.

"It's a natural progression for us," said Camacho. "Consumer credit is growing in these places, and credit insurance is very affordable. People want the protection."

Despite the swing in the United States toward debt-protection products, Burfeind from the Consumer Credit Insurance Association pointed out that credit insurance has existed since 1917, and he predicted "it will be with us for a long time.

"It's clear debt-protection products will erode some of our premium base, but my own conversations with some bank officials lead me to the conclusion that not all banks will go that way," he said. "Big banks are more aggressive in converting to debt-protection products."

Smaller credit-life insurers are not likely to see an immediate decline in business since many offer credit-life products through smaller channels, such as community banks in rural areas, according to an A.M. Best Co. statistical study, "Debt Deferment Products Hurting Credit Life." The study was published in the Aug. 26,2002 edition of Best Week and is available online at www.bestweek.com.

Birnbaum said credit insurance will probably become limited to parts of the country in which "it can be extremely profitable" or "where there is very weak regulation." He added that smaller lenders may continue to sell it because "they're not national in scope" and would not therefore benefit from a switch to debt-protection products as a way to reduce the regulatory burden.

A change in the regulatory climate, too, could alter the outlook for credit insurance. For example, easier insurance licensing of bank employees could dissuade some banks from abandoning credit insurance. Ormrod pointed out that the NAIC Producer Licensing Model Act already addresses the licensing problem by providing a limited license for credit life. "In most cases, no exam is required," she said. "It's now more a registration process, and the insurer is required to provide training." The model act is now law in more than 40 states, she said.

If licensing simplification were to spread to all 50 states, credit insurance "could thrive again," said Camacho. "If things change, we'll write it again," he added.

McMillan even envisions a possible scenario in which regulation could become more burdensome for debt-protection products if banking regulators impose minimum reserving on banks selling the products. Ormrod said, for example, that the 0CC recently issued rules requiring that reserves be maintained or that a contractual liability policy be purchased so that a bank's safety and soundness is in no way compromised by the offering of debt-protection products. "With minimum reserving, they might smell like insurance products," said McMillan. "Insurance commissioners could say they see consumer issues and that they have to get involved."

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Credit Life Direct Premiums, Top 100 Companies

As banks create debt-protection products, premiums written on credit
life insurance have fallen. Insurers also write credit disability,
credit unemployment and credit property/casualty, premiums for which are
not included in this table, but debt-protection products also cover
these risks.

                Direct
      Premiums Written
Year     ($ Thousands)

2001        $2,052,449
2000        $2,345,074
1999        $2,409,025
1998        $2,404,009
1997        $2,357,725

Source: A.M. Best's State/Line Products

RELATED ARTICLE: Benefits of Purchasing a Contractual Liability Policy

A contractual liability policy issued by a credit insurer makes it easier for a financial institution to be in the debt-protection business in the following ways:

1. No reserves are needed on a bank's books.

2. Bank earnings are a fixed percentage of fee production.

3. No actuarial oversight is needed at a bank.

4. Earnings do not fluctuate with moderately volatile involuntary unemployment risk.

5. Bank regulators need not worry about the effect of involuntary unemployment on a bank's solvency.

Source: Credit Re Corp., Hurst, Texas