F&I experts say tighter state regulations and competition from products such as GAP and service contracts have cut deeply into dealership sales of credit protection.
Richard Kizer defends the credit insurance industry, which isn't surprising considering he's chairman of Central States Health & Life Co. of Omaha in Nebraska, a leading provider of credit life and disability policies.
Kizer says there's still customer demand for the policies, but it's next to impossible for dealerships to make a profit selling them in what he calls overregulated states like California and Arizona. Even so, he says, the policies are a reliable profit center for many F&I departments, especially in the Midwest and Texas.
Automotive News Special Correspondent Jim Henry spoke with Kizer on July 14.
Who is the typical buyer of credit insurance today?
There are quite a few people in this country who live paycheck to paycheck, and unfortunately there are a lot of people who don't have adequate insurance protection. There are people who are frequent users of credit, who borrow money on a regular basis. These people are all potential customers for us.
Other types of insurance policies provide the same coverage that credit insurance provides. Isn't that an issue when it comes to selling credit insurance?
Close to 40 percent of Americans don't have life insurance. Disability causes close to 50 percent of all mortgage foreclosures. Death causes less than 5 percent of mortgage foreclosures. That's the primary reason people buy credit insurance, to protect people who do not have adequate insurance protection.
What's your sales penetration?
We sell in banks and credit unions and through automobile dealers. At dealerships, our products compete for shelf space with other good products. Banks and credit unions (making direct loans to the consumer) don't have the menu of products like dealers have, so our penetration is best at banks and credit unions. For banks and credit unions it's not unusual to have penetrations of 15 percent, 20, 30, 40 percent, even. We certainly have banks and credit unions as high as that.
How about for dealerships?
It's all over the board. It depends on the state, on commissions, on licensing ... and in light of all the other F&I products that are available for dealerships to sell. I would say ... our penetrations are under 5 percent.
How much do dealers earn on credit insurance?
There are some states that have commission caps. There are some states where there are no caps. I would say (dealer) commissions range from 25 to 50 percent; 25 percent would be unusually low, and 50 percent would be unusually high. Together, I would say it's probably something like 35 to 40 percent.
How does that work? Thirty-five percent of what?
Keep in mind that [customers'] rates are set by the states and based on the amount of coverage. Say, for example, I'm buying coverage on a car loan for a certain amount of time. The rate [charged to the customer] might be $1,000, just to make up a number. I'm Joe Car Dealer, and I sell to the customer an agreement that I will make his payments for as long as he's disabled. I'll earn a commission, in that 35 percent example I just gave you, of $350.
Why is it so hard to sell credit insurance in California?
It is not banned outright in California. What has happened in California over the years is that they have continued to reduce the rate that is charged to the customer and the commission that is paid to the dealer. That commission has gotten to such a level that dealers are looking to other products that are more attractive to the dealer and to the other F&I products that are available to them that offer the best opportunity of back-end income.
What can dealerships do to increase credit insurance sales?
For the F&I manager, the most important thing they do is to interview the customer and make sure the products sold to that customer meet that customer's needs.