insurance industry

CHICAGO -- Four insurance industry associations have issued a blistering comment letter criticizing the Federal Reserve Board's proposal to ease requirements for bank holding companies wanting to underwrite credit insurance.

insurance industry

The comment letter, filed jointly by the insurance groups, describes as unwarranted a Fed proposal to eliminate a regulation that requires bank holding companies to offer lower premiums as a condition for receiving authority for credit insurance underwriting.

That is, credit insurance subsidiaries of bank holding companies must set their premium rates below levels charged by credit insurance underwriters not affiliated with a bank holding company.

It is therefore reasoned that the public benefit -- lower premiums -- outweighs any negative results of bank holding companies engaging in credit insurance underwriting.

The Fed has solicited comments on its proposed elimination of the regulation. The insurance groups that drafted the letter are the National Association of Insurance Brokers, National Association of Casualty & Surety Agents, Professional Insurance Agents, and The National Association of Life Underwriters.

Collectively, the firms represented by these associations say they comprise most of the distribution network of the U.S. insurance industry.

Their letter is partly in response to comment letters, already on file with the Fed, that argue that the premium concession and policy benefit requirement of the board's regulation are burdensome and put bank holding companies at a competitive disadvantage in providing credit insurance.

The Federal Reserve Board in 1972 gave credit underwriting authority to bank holding companies. A year earlier, the Fed determined that certain insurance agency activities are "closely related" to banking.

Since then, holding companies have denied repeated allegations of overcharging on credit-related insurance products, which typically provide funds to pay off consumer loans if the insured borrower dies or becomes disabled.

But the insurance group's letter concludes that bank holding companies have a record of credit insurance overcharging. Thus, eliminating the rate concession requirement would only increase the potential for more overcharging, they said.

The associations also assert that bank holding companies have a record of coercing borrowers to purchase credit insurance, although a Fed study in 1979 showed that the granting of credit tied to the sale of credit related insurance products is "practically nonexistent." 'National Scandal'

The better statement is, "The sale of credit insurance is a national scandal." According to the letter, "rapacious overcharging, failure to return unearned premiums when loans are paid off or the borrower dies during the term of the laon, failure to notify survivors of borrowers that loans have been paid off by credit insurance, and tying sales of credit insurance to extensions of credit have all been common practises in connection with credit insurance sales."

Bank holding companies with credit insurance subsidiaries are among the guilty, the comment letter alleges. In light of such a history, the Fed's proposed elimination of the regulation "would be arbitrary, capricious, an abuse of the Board's discretion, and contrary to law," the letter states.

Rather than free bank holding companies from the current schedules of credit insurance premiums that reap "excessive" profits for the insurance subsidiaries of bank holding companies, the insurance groups state, the Fed should impose premium rates that would be more in line with reasonable profits, and be more of a benefit to borrowers

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