By Neal Boling
News Director | News Channel 11
Published: July 21, 2009

BY DAVID RESS

Media General News Service

Despite several state-ordered rate cuts during the past 15 years, credit insurers still have been taking a larger chunk of consumers’ dollars for their expenses and profits than allowed under state law.

Now, the State Corporation Commission is trying once more to prevent overcharging on credit insurance — the optional coverage consumers buy so their creditors are paid if the consumer dies or is disabled.

This month, the SCC ordered its sixth rate cut in a row for one variety of credit insurance and its fifth rate cut for a second.

More than 40 cents of every dollar Virginians pay for credit insurance has been going to insurers’ profits and overhead for much of the time since a 1993 state law tried to cap them in an effort to keep consumers from paying too much.

The overhead includes big commissions the insurers pay lenders and retailers for selling the coverage, as well as salaries, office and finance expenses.

With the latest cuts, which take effect Jan. 1, the coverage now can cost as much as $34 on a $1,000 loan.

Despite the small premiums, millions of dollars are at stake, typically paid by less-well-off consumers who don’t have other life or disability insurance.

Last year, Virginians paid $76 million for credit insurance, filings with the SCC show.

A state law says insurers are overcharging if their profit and overhead expenses exceed 40 percent — but those amounts have exceeded that level routinely since the law took effect in 1993.

“Forty percent for expenses and profit is more than generous. . . . Rates need to come down more,“ said Irene Leech of the Virginia Citizens Consumer Council, a nonprofit consumer advocacy group.

She said insurers’ large profits and big commissions show the companies are charging too much for the coverage. Many consumer advocates believe consumers are overcharged when insurers’ profits and overhead exceed 25 percent of premium revenue.

During the past three years, profits and overhead averaged 58 percent for one type of credit insurance — the coverage that pays off loans if a borrower is disabled — insurance company filings with the SCC show. Last year, insurers sold $44 million of this kind of coverage.

Profits and overhead for credit life insurance — which pays off loans when a borrower dies — averaged 43 percent during the same period, the filings show. Insurers sold $33 million of credit life insurance in Virginia last year.

Among the dozen most active insurers — those doing more than $1 million a year in business in Virginia — the profit and overhead figure rose as high as 89 percent last year, commission filings show.

One firm lost money — that is, collected less than its expenses — but otherwise, the lowest profit and overhead figure among those dozen most active insurers was 21 percent.

This month, the SCC ordered rate cuts of 4.7 percent for credit life insurance to take effect Jan. 1.

This will reduce the premium for coverage based on monthly outstanding balances, the kind of coverage used on credit cards, to 52.71 cents a month per $1,000 of debt from 55.3 cents.

The cuts will reduce the cost of single-premium coverage on a loan to 33.65 cents per $100 of loan from 35.3 cents.

The commission reduced rates for the 720 varieties of credit accident and sickness policies by 27.4 percent across the board.

For the costliest coverage, which runs for 10 years and begins payment if a borrower is sick or disabled for seven days, the rate cut will save a borrower $13 on a $1,000 loan.

Leech said those cuts aren’t deep enough, especially because rate cuts so far haven’t reduced insurers’ profit and overhead.

After the previous rate cut, which took effect in 2007, the proportion of consumers’ payments that went to insurers’ profit and overhead still increased by 2.5 percentage points for credit life insurance and 5.3 percentage points for credit accident and sickness insurance, filings with the commission show.

The rate cuts that take effect Jan. 1, like all the others that preceded them, are supposed to bring profits and overhead down to the legal 40 percent level.

But William F. Burfeind, executive vice president of the Consumer Credit Insurance Association, a Chicago-based trade association for credit insurers, said he’s concerned that the cuts might be too deep.

He said credit insurers keep missing the target because their biggest expense — the claims they pay to lenders when borrowers die or are disabled — is declining rapidly.

The reason, he said, is that people are living longer and remaining in better health.

“Other costs are not coming down,“ he said, adding that insurers need more revenue to cover a range of fixed costs, such as staff and facilities, that can’t be trimmed in size to match the decline in claims.

“We think it’d be better to say if claims fall a nickel, rates should fall a nickel,“ even though that increases the proportion of revenue covering nonclaims expenses, he said.

The association says the amount by which insurers missed the target in credit life is statistically insignificant.

Cutting the credit accident and sickness rates as much as the SCC ordered for Jan. 1 “will transform viable insurance products into industry losses,“ the association said in a formal filing this month.

Since 1993, the SCC has cut credit life insurance rates by 30 percent and credit accident and sickness rates by 43 percent.

David Ress is a staff writer at the Richmond Times-Dispatch.