Credit insurance: use of compensating balance and special deposit accounts

Issued and entered May 11, 1982 by Nancy A. Baerwaldt, Commissioner of Insurance

The Insurance Bureau has received reports of the use by some credit insurers in Michigan of compensating balances or special deposit accounts in connection either directly or indirectly, with credit life insurance programs of credit institutions. For the purposes of these guidelines, compensating balances or special deposit accounts include:

1. The deposit of premiums to the account of the insurer in the financial institution for which the insurer provides the credit insurance program, when such account is controlled by the institution or is either noninterest-bearing or at a rate of interest less than usual.

2. Remitting premiums to the insurer after the expiry of the grace period on a regular basis so that the arrearage period is constant.

3. The retention of premiums by an agent or broker to whom the financial institution remits premiums for a period of time which is not reasonably related to the time needed for the agent or broker to remit the premium to the insurer, if such delay is a continuing feature of the premium paying process.

4. Any other practice which unduly delays receipt of premiums by the insurer on a regular basis, or which is followed by an insurer when such practice involves the use of the financial resources of the insurer for the benefit of the financial institution.

The foregoing criteria apply regardless of whether premiums are due the insurer on the single premium advance system or on the monthly outstanding balance system.

The practices described above benefit the institution collecting the premiums in that the institution has the use of that money at little or no cost. Section 2024 of the Insurance Code of 1956, as amended (Code), provides:

The following are defined as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance:

Except as otherwise expressly provided by law, knowingly permitting or offering to make or making any contract of life insurance, life annuity or accident and health insurance, or agreement as to such contract other than as plainly expressed in the contract issued thereon, or paying or allowing or giving or
offering to pay, allow, or give, directly or indirectly, as inducement to such insurance, or annuity, any rebate of premiums payable on the contract, or any special favor or advantage in the dividends or other benefits thereon, or any valuable consideration or inducement whatever not specified in the contract; or giving, or selling, or purchasing or offering to give, sell, or purchase as inducement of such insurance or annuity or in connection therewith, any stocks, bonds, or other securities of any insurance company or other corporation, association, or partnership, or any dividends or profits accrued thereon, or anything of value whatsoever not specified in the contract.

Section 2066(1) of the Code, MCLA 500.2066(1); MSA 24.12066(1), includes a similar prohibition. Section 2066(2) of the Code, MCLA 500.2066(2); MSA 24.12066(2), provides for a mandatory revocation of the license of an offending party.

It is reasonable to infer that the use of compensating balances or special deposit accounts is an inducement to insurance. The Bureau staff shall, upon obtaining proof of the use of compensating balances or special deposit accounts, and upon ascertaining that their use is not specified in the applicable insurance contract, initiate compliance action pursuant to the Administrative Procedures Act of 1969, as amended (Act), MCLA 24.201 et seq; MSA 3.560(101) et seq, and the Code, MCLA 500.100 et seq, MSA 24.1100 et seq.

Nothing in these guidelines shall prevent an insurer from making deposits in a financial institution which are related to a credit insurance program in an amount of up to 3 months' expected claims for purposes of drawing drafts for claims payments, provided such procedure is available to all creditors of a given minimum size. Also, nothing in these guidelines shall prevent the insurer from making deposits in a financial institution which are not related to a credit insurance program.

RIGHTS AND PROCEDURES

The guidelines in this bulletin shall become effective June 15, 1982. In conformity with Section 3(6) of the Act, MCLA 24.203(6); MSA 2.560(103)(6), these guidelines are a statement of policy which the agency intends to follow, which does not have the force or effect of law, and which binds the agency but does not bind any other person. The operation of this bulletin does not suspend operation of any guidelines currently in effect.