Anyone who has ever bought a house or a car on credit probably had his lending institution require the purchase of a credit-insurance policy as a condition for getting the loan.
The policies vary in duration from 12 months to 30 years and ensure that loan payments will be made if a debtor dies or becomes disabled. They also compensate for catastrophic loss of property.
Credit insurers made nearly $5 billion in 1989, the most recent year for which statistics are available. Despite that impressive sum, consumers seldom get their money's worth, an oversight group says.
On average, credit insurers charge premiums that are too high compared with money paid in claims, according to the National Association of Insurance Commissioners, which consists of the top insurance regulators from each state and the District of Columbia.
The association has compiled a state-by-state "loss ratio" for credit insurers -- the amount paid in premiums vs. the amount paid in benefits. If a state has a 50 percent loss ratio, it means credit insurers registered there paid an average of 50 cents in benefits for every dollar they took in.
The association's target ratio is 60 percent. Nationwide, the average credit life insurer had a ratio of 37.6 percent, and accident and health insurers were around 49.8 percent in 1989.
High credit-insurance premiums aren't a problem in Maryland. In 1989, the state had a loss ratio of 54.4 percent, the second-highest in the nation, on premiums of $50.1 million, according to association data. New York was first, with a ratio of 66.9 percent. The District of Columbia was fourth at 53.8 percent, and Louisiana was last, at 22.6 percent.
Credit-insurance companies operating in Maryland are required by the state to record their ratios once a year, said Sidney Green, chief actuary with the state Insurance Division. Companies charging premiums the state deems too high have been forced to lower their premiums, Mr. Green said.
About 20 companies sell credit life insurance in Maryland, Mr. Green said. The larger ones are Credit Life of Ohio, Monumental General Insurance Co. and American Health and Life Insurance Co.
Viewed from a national perspective, Maryland and Washington are aberrations. Testifying about credit insurance at a public hearing in Washington in November, North Dakota Insurance Commissioner Earl Pomeroy said that "the non-competitive aspect of this market is proven by the shamefully low loss ratios, which reveal clear price-gouging throughout the credit-insurance industry."
An insurance industry spokesman noted that lending institutions usually demand such credit life policies and blamed the lenders for the problem.
"Keep in mind that it's not the insurance companies that sell this, it's the banks that offer it as a requirement for getting a loan," said Peter van Aartrijk of the Insurance Information Institute Inc. "Very often, the extension of credit is tied into the sale of the insurance product, which protects the financial institution's assets. It's often the way they do business."