Coercion in the Selling of Credit Life Insurance

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1 Coercion in the Selling of Credit Life Insurance John M. Barron and Michael E. Staten Purdue University ABSTRACT Credit life insurance, which repays some or all of a borrower's outstanding debt in the event of death, has been a controversial subject for many years. Critics assert that, despite regulations that limit tied sales, pressure on loan officers to generate fee income through cross selling creates an incentive for coercion of borrowers. Allegedly, some sales techniques leave the consumer with the false impression that the purchase of credit insurance was necessary to obtain the loan. This article measures the frequency with which creditor efforts to sell credit insurance transform the sales message from persuasive to coercive. A methodology is developed for measuring the impact of coercive selling pressure applied to borrowers at the point of sale. Data used to measure the effect of coercive pressure are taken from an extensive survey of borrowers conducted during Not only are public policy concerns about coercion in the selling of credit insurance addressed, but more generally the article offers a methodology to quantify the influence of the customer's point-of-sale experience on the decision to purchase any financial service John Wiley & Sons, Inc. Financial institutions in recent years have become a smorgasbord of deposit, transaction, loan, insurance, and investment products. It has become axiomatic for banks and credit unions that survival against nonbank competitors requires establishing additional relationships with existing depositors through the cross selling of other products. The emphasis on relationship banking has generated many instances in which the offer of one product is tied to the purchase of another (e.g., an ATM card is only available with a certain package of checking account services). Although tied or bundled sales are perfectly acceptable in many contexts, state and federal regulations limit such packaging of consumer loan products. The rationale is that the creditor's option of accepting or rejecting a loan application gives the institution unfair leverage over the consumer, which could be used to force the purchase of additional products. Credit insurance products in particular are often criticized for being foisted upon unwary consumers applying for loans. These products are designed to repay some or all of a borrower's outstanding debt in a variety of situations, depending upon the type of coverage. For example, credit life insurance repays the outstanding debt in case of the borrower's death; credit accident and disability insurance takes over the monthly payments on debt while the borrower is incapacitated. Psychology & Marketing Vol. 12(8): (December 1995) 1995 John Wiley & Sons, Inc. CCC /95/

2 As of the end of 1992, over $202 billion of credit life insurance was in force on over 56 million consumer loans in the U.S., generating significant fee income for banks, credit unions, and other nonbank financial services firms. Despite the apparent popularity of the product, credit insurance has been a controversial subject for many years. Consumer advocates argue that credit grantors push overpriced insurance products on borrowers who are uninformed, unaware, or coerced, and who, in most cases, do not need the coverage. 1 They assert that it is unlikely that creditors could attain observed penetration rates (in excess of 50% of all borrowers for some types of loan products) with such relatively high-priced products if the purchase was entirely voluntary on the part of well-informed consumers. By implication, the critics of credit insurance claim that the high penetration rates occur because many borrowers are either misinformed about the product or are unaware of the purchase. The critics assert that, despite regulations that limit tied sales, pressure on loan officers to generate fee income by cross selling creates an incentive for sales techniques intended to leave the consumer with the impression that insurance was necessary to obtain the loan. This article focuses on the frequency with which creditor efforts to sell credit insurance transform the sales message from persuasive to coercive. Data used to measure the effect of coercive pressure are taken from a survey of borrowers conducted by Purdue University's Credit Research Center (CRC) during Not only are public policy concerns about coercion in credit insurance selling addressed, but more generally this article offers a methodology to quantify the influence of the customer's point-of-sale experience on the decision to purchase any financial service. The article begins with a description of the general conclusions and limitations of prior surveys of credit insurance customers. Also discussed are the features of the 1993 CRC borrower survey, which provides a richer set of data to support the subsequent tests for coercion. To quantify the impact of alleged coercive or deceptive selling practices on credit life purchases, a simple model is developed to describe the demand for credit insurance, assuming a market without coercion to buy. The model, which indicates the types of borrowers more likely to purchase, is tested using the CRC survey data. The evidence suggests that borrowers who purchase credit insurance appear to be matching insurance coverage to their particular financial situation. This finding mitigates the validity of the coercion hypothesis as an explanation for why insurance is purchased. To probe further, the extent to which borrowers reported the (false) impression that insurance would affect loan terms or approval is examined. Also considered is the extent to which individuals say they felt pressured to sign up for credit insurance. This introduces the key issue: the impact of consumer impressions of coercion on actual purchases of credit life insurance, controlling for other factors that can influence the decision to purchase. Evidence indicates the correlation is not substantial. The article concludes by considering the correlation between borrower's impressions of sales pressure and borrower demographics, the type of creditor, and the actual purchase decision. 1 Borrowers either don't know they've purchased the product, think its [sic] required, or are manipulated in other ways by sellers... That is why banks, finance companies and car dealers sell credit life to more than half of those financing installment purchases." Robert Hunter, President, National Insurance Consumer Organization, in a quote taken from a May 20, 1992 press release by the Consumer Federation of America.

3 SURVEYS OF CREDIT INSURANCE CUSTOMERS During the 21-year period following passage of the Consumer Credit Protection Act of 1968, four national surveys of credit insurance customers provided a body of empirical evidence regarding customer attitudes toward the product. 2 A primary concern in each study was the extent to which borrowers felt pressured to purchase insurance. In consumer loan transactions, coercive pressure has generally been defined as the explicit or implicit suggestion to the borrower that loan approval was conditional on the purchase of insurance when, in fact, it was not. 3 The assumption behind each survey was that pressure applied to a reluctant borrower would, on average, be reflected in diminished customer satisfaction with the credit insurance purchase. Consequently, each of the surveys constructed a series of questions regarding sales effort, reasons for purchase, and willingness to purchase again. A common theme emerged from the four surveys. Most purchasers viewed credit insurance favorably, in terms of price and value of the service. Both purchasers and nonpurchasers appeared to have had rational economic motives for their decision, as opposed to being pressured or coerced at the point of sale. Still, open questions remained regarding the selling of credit insurance products. For example, although coercion appeared not to have been the primary factor driving insurance purchases, the fact that one out of five borrowers as recently as 1985 said that they thought credit insurance was either required or strongly recommended (Cyrnak & Canner, 1986) left the door open on arguments that some coercion to buy is still an important phenomenon in the market (at least, for some categories of borrowers). Interestingly, none of the previous studies addressed the socioeconomic characteristics of those borrowers who felt strongly that credit insurance was required or would help their chances for obtaining their loan. Purchaser profiles reveal that credit insurance is more frequently purchased by older borrowers and by borrowers with lower incomes and education. Some critics have suggested that these groups have purchased credit insurance products more frequently precisely because they have been susceptible targets of coercive sales tactics, by virtue of being marginal credit risks. Without more detailed analysis of who felt pressured at the point of sale and whether or not they purchased insurance, this possibility cannot be dismissed. To address unresolved questions from prior studies more precisely, CRC undertook a mail survey of consumers who received installment loans during The survey focused on whether these individuals were offered credit life insurance at some point during the loan transaction. A short series of questions probed customers' knowledge of whether additional coverage (accident and disability, unemployment) had been purchased. Several issues to be investigated required the use of data on both the actual purchase decision as well as the customer's perceived purchase (recognizing the possibility that the customer's recollection of the transaction may not be what actually happened). Consequently, creditors were solicited to participate in the survey by drawing random 2 These four studies are Hubbard (1973), Huber (1978), Eisenbeis and Schweitzer (1979), and Cyrnak and Canner (1986). 3 In many states it is not illegal for a creditor to require credit insurance on a consumer loan. However, Federal Truth-in-Lending statutes place significant constraints on creditors who do require insurance (Truth in Lending Act, 15 U.S.C. 1601, Title 1). Charges and premiums for required credit insurance must be included in the calculation and disclosure of the finance charge. In a competitive rate environment, these requirements are sufficiently stringent that most companies choose not to require the insurance on the loan.

4 samples of their new loan customers, subdivided according to whether or not insurance was purchased. Four types of creditors were included in the sample design: consumer finance companies, automobile finance companies, banks, and credit union. Participating firms were instructed to sample randomly across three groups of borrowers: Table CRC Survey of Borrowers Number of Number of Surveys Type of Surveys Returned as Number of Response Creditor Mailed Undeliverable Respondents Rate Auto finance companies 16, , % Consumer finance companies 8, % Banks 12, % Credit unions 3, Total 40, , % purchasers of credit life insurance only, purchasers of credit life insurance plus accident/disability insurance, and borrowers who did not purchase credit insurance. Questionnaires sent to each group were identical in content, but were color coded to allow identification of the purchase category. Table 1 provides a breakdown of response rates by type of creditor. To avoid the respondent confusing private mortgage insurance with, credit insurance products, the sample design excluded first mortgage loans. Also excluded were credit card accounts, because most credit insurance sold in conjunction with credit cards is typically offered via telemarketing or direct mail after the customer has been approved for (or received) the card, eliminating the opportunity for coercion. The sample was drawn from all other types of consumer loans. Credit unions and banks were asked to partition their samples equally between auto loans and other consumer installment loans. 4 Consumer finance companies sampled customers who recently received loans or revolving lines of credit (not credit cards). Of course, all loans from auto finance companies were auto loans. The broad range of loan sizes represented in the sample provides an advantage in testing for potential coercion. Compensation paid to the credit insurance salesperson (i.e., the agent at the point of sale, who is usually the loan officer or finance and insurance manager) is often tied to the size of the loan. Because the agent's compensation is potentially larger on the sale of credit insurance to an auto loan customer, relative to smaller installment loans, his or her level of sales effort is likely to be higher. This incentive is consistent with the common perception of the auto 4 A small sample of borrowers who obtained revolving home equity lines of credit from banks was also included.

5 dealership as a high-pressure sales environment, an a priori expectation of a higher likelihood of coercive sales practices. The approach of using borrower impressions of the sales pressure as a signal of potential coercion can be quite subjective. The problem arises because some kinds of pressure to buy are clearly more objectionable (and possibly illegal) than others. A coercive pressure that suggests that loan approval is linked to the purchase of credit insurance is different from legitimate salesmanship designed to convince the borrower of the merits of the product. When a respondent feels pressured, which kind of pressure does he or she have in mind? The CRC survey dealt with the issue by using supplemental questions about whether the salesperson mentioned that insurance was not required, and whether the borrower thought that approval (or loan terms) was linked to the purchase of insurance. In addition, a simple question about the timing of the offer of credit insurance revealed much about the type of pressure felt, particularly when the insurance' was not mentioned until after the loan was approved. Such questions were absent from previous surveys. Previous surveys of credit insurance customers did not sample in such a way as to obtain only recent loan transactions. Because many questions on the CRC survey dealt with the customer's recollection of the insurance offer (whether an offer was made, impressions of sales pressure, and information provided), it was important to select recent,borrowers, ideally for whom no more than 60 days had elapsed between the time of the loan transaction and the time their name was pulled for the sample. Participating creditors were instructed to sample customers accordingly. Assuming an additional 2-4 weeks for distribution of the survey after the sample was pulled, no more than 90 days should have elapsed between the loan transaction and the customer's receipt of the survey. Because the survey included specific questions about the insurance offer, it was also important to the analysis for the customer to have the correct transaction in mind. On the other hand, the respondents were promised anonymity. To make credible this promise, the survey materials sent to consumers made no direct reference to the name -of the creditor to avoid intimidating respondents by planting the fear that their answers might somehow become known to their creditor (or to raise suspicions about how much the researchers knew about their account). Instead, the cover letter from CRC that accompanied each questionnaire was tailored to one of the four types of institutions participating in the study. Each letter referred to the customer's recent "loan from a bank" or "your credit union," et cetera. 5 By targeting recent borrowers and highlighting the type of loan and institution, the transaction should have been sufficiently framed in the respondent's mind. This allowed the questionnaire to probe more meaningfully about impressions of sales pressure, as well as whether the insurance was inadvertently purchased. A SIMPLE MODEL OF THE DEMAND FOR CREDIT INSURANCE What factors influence a borrower's decision to purchase credit insurance? This section analyzes the demand for credit insurance assuming. a market without coercion to buy. It begins by briefly describing a model of credit insurance purchases that indicates which type of borrowers would be more likely to purchase. Then the model's predictions are tested with the survey data to determine whether actual purchasers appear to be matching insurance coverage to their particular financial situation and objectives. 5 Copies of the cover letters and matching questionnaires are available from the authors.

6 The economics literature contains well-known models of the decisi6n to purchase insurance. 6 To adapt standard insurance models to apply to credit insurance, the following four key assumptions are made: Firms offer credit insurance only in conjunction with loans. The amount of coverage equals the amount of the loan. Suppliers do not impose eligibility criteria or restrictions on coverage (e.g., credit insurance is sold through the lender as group insurance). Neither loan approval nor credit terms are conditional on the purchase of insurance. The borrower whose life would be insured through credit insurance is the decision maker with respect to the insurance purchase. Adapting the standard insurance models in this way to credit life insurance reveals that the demand for credit life insurance depends on the following four general factors: The Probability of an Insurance Payment (Death). Credit life insurance makes payments in the event of the death of the borrower. Thus the borrower's subjective probability that insurance benefits will be paid is simply his or her probability of death. A higher probability of death will increase the expected value of insurance benefits and thus increase the demand for credit life insurance. One key factor that presumably influences an individual's subjective probability of death is age, with older individuals attaching a greater likelihood of death over the term of the loan. The Perceived Value of an Insurance Payment. Each borrower places a subjective value on the payment of insurance benefits. The greater the perceived value of the payments, the greater the demand for credit life insurance. This subjective value of payments is directly associated with the strength of the bequest motive, a concept that refers to the decision maker's attitude toward financially supporting his or her estate (and dependents) after death. The subjective value also varies inversely with such factors as the expected size of the household's wage income stream without the borrower's income, the current asset holdings that could be tapped to supplement expected future household wage income, and the face value of other insurance policies owned. The Perceived Cost of Credit Life Insurance. Each borrower places a subjective cost to purchasing credit life insurance. The market price of insurance measures the objective cost of the insurance in terms of the amount of other consumption goods foregone. The perceived cost reflects the value of other consumption goods foregone due to the purchase of credit life. An increase in the market price of credit life insurance raises this perceived cost of credit life insurance for all potential buyers, because it increases the quantity of other consumption goods foregone. Moreover, at any given market price, those borrowers who place a greater value on other consumption goods will perceive a greater cost to credit life insurance, and thus have a reduced demand for credit life insurance. The Price and Availability of Other Life Insurance. A higher price or reduced availability of other life insurance (a substitute for credit life insurance) will increase the demand for credit life insurance. In order to empirically estimate the demand for credit insurance, data gathered though the 1993 borrower survey were used to construct proxies for the four theoretical factors listed above. 7 One is a dummy variable equal to 1 if 6 For example, see Arrow (1971) and Ehrlich and Becker (1972). 7 Note that the discussion to follow does not include the most direct proxy for the perceived cost of insurance, namely, the price of insurance. Although the exact premium charged each respondent is not known, it is possible to approximate the price charged for credit insurance by using the respondent's state of residence and setting a price proxy equal to the state prima facie rate (regulatory ceiling) for single premium credit life insurance. This measure is utilized in Barron and Staten (1994, chap. 7), but it is not appropriate for the demand equation estimates described in this article because of the survey sample design. For reasons described in Barron and Staten (1994, chap. 3), participating creditors were asked to draw a sample of recent borrowers in fixed proportions (one third credit life purchasers, one third purchasing life plus other coverage, one third not purchasing insurance) across geographic regions (by state, in most cases). Consequently, the ratio of purchasers to nonpurchasers surveyed is the same in bigh-rate states as it is in low-rate states.

7 the borrower was over 45 years old. Because older individuals face a higher probability of death, it is expected that borrowers over the age of 45 have a greater demand for credit life insurance. In addition, older individuals typically face higher prices and reduced access to other insurance. This increase in price and reduced availability of other insurance reinforces the prediction that older individuals will more likely buy credit life insurance. In contrast, more educated individuals are typically more aware of other insurance options. Other things equal, individuals with greater formal, education should be less likely to purchase credit life insurance. There are six factors that might serve as proxies for the perceived value of credit life insurance: marital status, number of dependents, degree of aversion to taking financial risks, holdings of other life insurance, homeowner status, and household income. The strength of the bequest motive is directly related to presence of a spouse and the number of dependents. For this reason, married borrowers and borrowers with a greater number of dependents should have greater demand for credit life insurance. The strength of bequest motive is also directly related to risk aversion. 8 More risk-averse borrowers should be more likely purchasers of credit life insurance. Borrowers with other life insurance over $50,000 are likely to place a lower value on additional credit life insurance, and thus be less likely to demand credit life insurance. Homeownership should identify individuals with larger current asset holdings, who would place a lower value on insurance payments. Homeowners should be less likely to purchase credit life insurance. The same should hold for individuals with greater household income. 9 There are two variables that may serve as proxies for the perceived cost of credit life insurance. High household income may indicate individuals with a lower perceived cost of credit insurance. Specifically, high-income borrowers have greater current consumption, which reduces at the margin the perceived cost (in terms of the value of consumption foregone) to the purchase of credit life insurance. However, greater household income has already been mentioned as a potential indicator of lower perceived value for credit life insurance. Consequently, the net effect of higher incomes and credit insurance demand is ambiguous. Similar offsetting effects arise from the variable measuring number of dependents. Although an increase in the number of dependents may raise the perceived value of credit life insurance, an increase in number of dependents also reduces the household's per capita consumption (for a given household income). This will raise the perceived cost (in terms of consumption foregone) of credit life insurance. The net effect on demand for credit life insurance is ambiguous. Finally, a group of variables is included that use ethnicity to measure the impact of cultural heritage on the demand for credit life insurance. In particular, a set of five variables take on a value of 1 if the respondent identified him- or herself as African Americans, Hispanic, Native American, Asian American, or an ethnic group other than White, respectively. Out of the total respondent base of 3630 who returned surveys, 3046 individuals (84%) answered all of the questions used to construct the above set of variables. Note that 63% of the 3046 respondents purchased some form of credit insurance (either credit life only or life plus other coverage). About 43.2% of those who purchased any credit insurance also purchased coverage in addition to credit life. The results of a test of the hypothesized relationships of these variables are reported in Table 2. Specifically, Table 2 reports the estimates for a probit model of the purchase of any credit insurance (life or life plus other coverage), utilizing a dependent variable that indicates whether the respondent actually purchased credit life insurance (this variable equals 1 if a purchase occurred, 0 otherwise). 10 In 8 The risk-aversion variable takes on values from 1 to 5. A value of 1 indicates that the individual is willing to take substantial financial risk for substantial return. A value of 2 indicates that the individual is willing to take above-average risk for above average return, values of 3-5 indicate the individual is willing to take average financial risks and return, below-average risks and not willing to take any financial risk, respectively. 9 The survey's measure of total household income falls into one of eight categories. Median values are assigned for each category (reported in $10,000 increments for the $0-$50,000 range, then in $25,000 increments to $100,000); the highest interval of $100,000 or more was assigned a value of $100, Similar results are obtained for a logit method. Both probit and logit models are designed for cases in which the dependent variable is a discrete choice. In the probit model, an estimated coefficient does not directly indicate the effect of a change in the associated explanatory vari able on the purchase probability, but rather indicates the effect of the change on the upper bound of the cumulative distribution function of the standard normal distribution. Column 4 in Table 2 translates this change in the upper bound into the resulting effect on the purchase probability. This is what is referred to below as the marginal effect on the likelihood of purchase.

8 the table, asterisks identify coefficients that are statistically significant from 0 at the confidence level on a two-tailed test. Later discussions focus only on those variables that are statistically significant under this criterion. With probit models, the interpretation of the magnitude of coefficients is not straightforward. The fourth column in Table 2 provides the marginal effect or derivatives for each of the independent variables. That is, each term in the fourth column indicates the average change in the probability that an individual purchases credit life insurance given a one-unit change in the associated independent variable. More specific examples are provided below. A methodological point deserves emphasis: The underlying theoretical model of credit insurance demand assumes no coercion or underwriting at the point of sale. Observed relationships in the data that are consistent with those predicted by the simple model of insurance without coercion suggest that consumers purchased credit insurance products out of rational economic motives. Of course, this does not prove that coercion was not present and influencing consumers in the sample. However, consistent predictions would demonstrate that the purchase patterns evident in the sample are readily explainable without reliance on seller coercion as a factor. 11 Table 2 indicates that, other things equal, respondents who rent their homes, have less than $50,000 of other life insurance, have not gone to college, and have lower incomes are more likely to purchase credit insurance. 12 These relationships are consistent with a perception of credit insurance products as a valuable safeguard against the impact of future lost earnings by those with fewer financial alternatives. Recall that no unambiguous prediction was made on the relationship between credit insurance demand and the racial/ethnic variables or the variables on marital status and number of dependents. Binary variables were included in the probit equation for African Americans, Hispanics, Native Americans, Asian Americans, and other ethnic groups, with the excluded group being those who identified themselves as White. The results suggest that certain groups, in particular African Americans, Hispanics, and Native Americans, are more likely to purchase credit life insurance than other groups, holding other factors such as education and income constant. Note that the marginal effects reported in Column 4 in Table 2 provide estimates of the independent effect of each of these variables on the likelihood of the purchase of credit life insurance, other variables held constant. For instance, other things equal, the probability that an individual purchases credit life decreases by if the individual has other life insurance over $50,000, but increases by if the individual is over 45 years old. The marginal effects can compound to jointly affect the probability of purchase. To illustrate, Table 3 reports the predicted probabilities of credit life purchase for five types of individuals. At one extreme are type A individuals, who would be unlikely to purchase life insurance. The particular type A individual picked from our sample is a 39-year-old, white, college-educated homeowner, an individual with an income of over $100,000, who has other life insurance over $50,000, and who is not at all risk averse (in fact, this person is willing to accept substantial financial risk for substantial return, with a risk-averse index equal to 1). The probit model reported in Table 2 predicts a 0.23 probability that such an individual would purchase credit life insurance. 13 In other words, only 23 out of 100 such individuals are predicted to purchase credit life insurance. 11 Subsequent sections explicitly consider the potential effect of coercive practices on the purchasing of credit life insurance. 12 Note that in the discussion of the insurance model, the hypothesized sign on the income variable was indeterminate. Higher income reduces the cost of insurance in terms of value of consumption goods foregone; but higher income implies more substantial household assets, which would reduce the perceived value of insurance. The asset effect on the demand for insurance appears to dominate, as higher income reduces the demand for credit life insurance. 13 In addition to the characteristics listed above, this prediction and the ones to follow assume a married individual with two dependents.

9 In contrast, consider a type E individual described in Table 3. This individual is a 52-year-old African American with a high-school education, an individual who rents, has an income between $20,000 and $30,000, does not have other life insurance over $50,000, and is very risk averse (in fact, this person is not willing to take any financial risk, with a risk-averse index of 5). The probit model of the credit life purchase decision reported in Table 2 predicts a 0.94 probability that such an individual would purchase credit life insurance. In other words, 94 out of 100 such individuals are predicted to purchase credit life insurance. The marginal effects of changes in each of the key factors reported in column 4 of Table 2 help explain the difference between a prediction that 23 out of 100 people like type A would purchase credit life insurance, whereas 94 out of 100 people like type E are predicted to purchase credit life insurance. Comparing the second individual to the first, the increase in age to over 45 years old would, by itself, increase the probability of purchasing by Being African American increases the probability by , other things equal. Not being a homeowner raises the probability of purchasing credit life insurance by Not being a college graduate increases the probability of purchasing credit life insurance by An income of $25,000 instead of $100,000 increases the probability by ( times 75). Not having other life insurance over $50,000 increases the probability of purchase by Finally, being very risk averse increases the purchase probability by (0.019 times 4), other things being equal.

10 Table 3 Predicted Probabilities of Credit Life Insurance Purchase Attributes of Description Description Description Description Description individuals of Type A of Type B of Type C of 7ype D of Type E Individuals Individuals Individuals individuals Individuals Home Owner Yes Yes Yes Yes No Has other life Yes Yes Yes No No insurance over $50,000 Education level College College Some Some High school college college degree degree diploma Level of household Over $50,000- $40,000- $30,000- S21,000- $100,000 income $75,000 $30,000 S40,000 $30,000 Degree of aversion to taking financial Risks Age is over 45 No Yes Yes Yea Yes years old African American No No No Yes Yes Predicted Probability such an individual purchases credit life insurance A simple sum of the marginal effects of the seven differences listed above suggests a total increase in the probability of a purchase equal to 0.81 in comparing the first individual to the second. However, the actual increase in the predicted probability of purchasing credit life insurance is 0.71 (the difference between 0.23 and 0.94). Thus, although summing marginal effects is helpful in understanding the relative effects of various attributes on the purchase probability, it is somewhat misleading in providing the exact difference in purchase probabilities between two very dissimilar individuals. The reason for this is that the marginal figures for each variable indicate what would be the change in the probability of purchasing credit life insurance for the typical survey respondent given a one-unit change in that variable alone. DIRECT MEASURES OF COERCION AND PRESSURE As a matter of company policy, none of the creditors participating in the 1993 CRC survey required consumers to purchase credit insurance as a condition for obtaining a loan. Of course, borrowers may have perceived some linkage between insurance purchase and loan approval. It is also possible that this perception was strengthened by comments made by the salesperson. The 1993 survey included four questions to identify whether the customer perceived such a linkage, and, more generally, whether they felt pressured. For each statement regarding the insurance offer, borrowers were asked whether they strongly agreed, agreed, disagreed, strongly disagreed, or could not recall. The two charts contained in Table 4 report the incidence of such impressions among respondents. The first chart includes the sample of all borrowers who recalled that they were offered credit life insurance. The second chart describes the sample restricted to those who actually purchased credit life insurance. Approximately 77% of respondents agreed or strongly agreed that the person handling the loan explained that buying credit insurance was not required. Table 4 indicates that only about 17% of all borrowers who were offered insurance (19% of all purchasers) said that the person handling the loan had not explained that buying credit life insurance was optional Another 5.4% could not recall if the person explained buying credit insurance was optional.

11 The proportions of borrowers who thought credit life insurance would improve their chances of getting the loan or getting better terms were 12.0% and 6.0%, respectively 15 Even among purchasers of credit life insurance, the percentages of respondents who thought it would improve their chances of getting the loan or terms of the loan were only 15.1% and 7.3%, respectively. Finally, 10.9% of borrowers who were offered credit insurance (12% of those who actually purchased it) agreed or strongly agreed that they felt pressured to sign up for the insurance For these two questions, 1.4% and 1.2%, respectively, could not recall. Thus, 86.6% of respondents disagreed or strongly disagreed that buying credit insurance would help his or her chances of obtaining the loan. Of the respondents, 91.8% disagreed or strongly disagreed that buying credit insurance would get better credit terms (lower interest or fees). 16 Another 1.4% could not recall any pressure. The remaining 87.7% disagreed or strongly disagreed that they were pressured by the person handling the loan to sign up for credit life insurance.

12 Two important qualifications should be noted in interpreting the data from Table 4 as a measure of coercive selling tactics. First, the instances in which an individual clearly recalled an explanation that credit life insurance was not required temper the concern that such individuals were the target of coercive pressure to buy insurance. By separating out those who were told that credit life insurance was optional, Table 5 reveals that buyers who might have experienced coercive pressure are a relatively small group. Specifically, although 15.0% of all actual purchasers thought that buying credit life insurance would help them get the loan, about half of this group said the salesperson told them that the insurance was not required. Consequently, only 7.3% of all actual purchasers could have experienced coercive pressure. Similarly, only 3.0% of all actual purchasers thought purchasing credit insurance would help them get better terms and had not heard an explanation that credit life insurance was optional. Finally, those who felt pressured and did not recall an explanation that insurance was optional represented only 7.6% of all buyers of credit life insurance. A second qualification to the measures of coercive pressure concerns the timing of the credit life insurance offer. An insurance sales pitch delivered after a loan has been approved cannot use a coercive threat of loan denial to push the customer into buying insurance. Table 6 reveals that 68.7% of all respondents did not receive a sales pitch for credit insurance until after the loan application had been approved. Consequently, the number of individuals who could have experienced coercive pressure shrinks further if the focus is on those 27.8% who were offered insurance prior to the approval of the loan (top row of Table 6). As a percentage of all respondents, only 3.5% were offered credit life insurance prior to loan approval and felt that obtaining credit life insurance would improve the chances of getting the loan. Only 1.5% of all respondents were offered insurance prior to loan approval and felt pressured. Even among those who actually purchased credit life insurance (not shown), the comparable figures were quite small, 4.7% and 1.6%, respectively. 17 THE EFFECT OF COERCION AND SALES PRESSURE ON INSURANCE PURCHASES How are borrowers' impressions of coercive linkage and/or sales pressure associated with the decision to purchase credit life insurance? This section directly measures their impact on insurance purchases. Recall the previously estimated probit model of the demand for credit life insurance. Four additional selling tactics variables can be added to that model to obtain an estimate of their effect on the purchase decision. These four variables are (a) a variable equal to 1 if the person handling the loan did not explain that credit insurance was optional, (b) a variable equal to 1 if the respondent felt that purchasing credit life insurance would improve the chances of obtaining a loan, (c) a variable equal to 1 if the respondent believed that purchasing credit life insurance would help get better credit terms, and (d) a variable equal to 1 if the respondent felt pressure to buy credit life insurance from the person handling the loan. Table 7 presents partial results from the reestimation of the probit demand including the four selling tactics variables. 18 As the estimated marginal effects recorded in the center column of Table 7 indicate, the presence of three of these four selling variables significantly increases the probability of purchasing credit life insurance, other things equal. For instance, if the respondent did not remember hearing that credit insurance was optional, it increased the probability of this individual purchasing credit insurance by 0.058, other things equal. Because the probit model controls for other factors that influence the purchase decision, we conclude that approximately 1 out of every 17 individuals not informed that credit life insurance was optional purchased it because they did not know it was optional. If the individual felt credit insurance would improve chances of getting the loan, the probability of purchasing insurance rises by That is, approximately one out of every eight individuals who thought purchasing credit insurance would help get the loan purchased credit life insurance because of this perceived gain. Finally, feeling pressured to purchase increased the probability of purchasing credit life by 0.057, other things equal. 17 These total figures differ slightly from Table 4, as the sample is restricted to those who answered the question on when the offer was made. 18 For brevity, only the marginal effects for these new selling tactics variables are reported. The coefficients and marginal effects of the original demographic variables are similar to those reported in Table 2. Note that the results are essentially the same if the demographic variables are omitted.

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15 The last column of Table 7 translates the marginal effects of the selling tactics into a prediction concerning the percent of individuals who purchased credit life due to such practices, controlling for other factors. For instance, given that 18% of individuals in the sample recalled that they were not informed that buying credit insurance was optional and given a marginal effect on the probability of purchasing credit life insurance if this occurred of 0.058, then 1.0% (0.058 times 18%) of all purchasers of credit life insurance could be attributed to this selling practice. A similar calculation indicates that 1.6% of all purchasers of credit life insurance did so under the belief that it improved their chances of obtaining the loan, and 0.6% of all purchasers of credit life insurance did so as a result of the sales pressure from the person handling the loan. The influence of each sales message on actual purchases of credit life insurance appears small. Yet, even these small estimates may overstate the potential effect of eliminating such practices. The estimates compare the current situation with what would exist if no respondent reported such practices or beliefs. Yet even if all creditors were completely forthright in their offer of credit life insurance for all loan transactions, it is unlikely that this would completely eliminate reports by borrowers that they (a) were not informed that credit insurance was not required, or (b) that they believed credit insurance helped their chances of obtaining a loan, or (c) that they were pressured to sign up for credit insurance. DIFFERENCES IN SELLING PRACTICES ACROSS GROUPS Table 7 indicates that allegedly coercive sales tactics have, at most, a small impact on the total volume of credit insurance sales. Nevertheless, certain groups of consumers may be affected significantly more than others. To

16 systematically investigate such differences, Table 8 estimates probit models for each of the four questions related to consumers' impressions of the insurance offer, including as independent variables the set of demographic variables, type of creditor/loan variables, and purchase decision variables. The samples are restricted to those who responded to the particular question on the sales tactics and provided complete demographic information. For each equation, the dependent variable equals 1 if the respondent agreed or strongly agreed with the statement. Table 8 offers several interesting findings. For instance, those who were young, less risk averse, or highly educated were more likely to report being pressured. Yet not one of these three groups was more likely to have felt that the purchase of credit life insurance would help them get the loan or lead to better terms. This suggests that the pressure felt by these respondents was simply selling tactics, instead of the coercive pressure that derives from suggestions of a tied sale. In fact, for no demographic group, with the single exception of renters, was a recollection of significantly greater pressure to buy accompanied by significantly greater belief that insurance would improve the chances of obtaining the loan. Both Hispanic and African American respondents are less likely to remember hearing that the purchase of credit insurance was not required, and more likely to believe that the purchase of insurance would help them get the loan or better terms on the loan. Table 8 illustrates these differences (controlling for other factors). However, none of the minority groups felt significantly more pressure to purchase insurance, relative to Whites.

17 In general, customers of credit unions and banks were less likely to feel pressure, relative to customers of finance companies and auto finance companies. (The latter group presumably received their offers of insurance at the auto dealerships.) Similarly, borrowers using consumer finance companies and auto finance companies resemble each other in that both were more likely to report that they had not been told that credit insurance was optional, relative to bank and credit union customers. CONCLUDING REMARKS Coercive or excessive pressure on borrowers to purchase credit insurance has been cited as an important variable affecting individuals' purchase of credit insurance. A simple theoretical model of the demand for credit insurance is tested using data from the 63% of respondents to the 1993 CRC survey who purchased some form of credit life insurance and the 37% of respondents who did not purchase credit life insurance. Observed relationships match those predicted by the model, suggesting that purchase patterns for credit insurance are readily explainable without reliance on seller coercion as a factor. Controlling for other factors that influence the decision to purchase credit life insurance, it is estimated that a maximum of 1.0% of purchasers did so because they believed insurance was required. An additional 1.6% of all credit life purchasers did so because they believed that it improved their chances of obtaining the loan, and 0.2% of purchasers thought insurance would get them better loan terms. Finally, up to 0.6% of all credit life purchasers did so because of sales pressure. Consequently, selling coercion alone is estimated to account for a maximum of 3.4 percent of credit life insurance sales.

18 REFERENCES Arrow, K. J. (1971). Insurance, risk and resource allocation. In Arrow (Ed.), Essays in the theory of risk-bearing. Chicago: Markham. Barron, J. M., & Staten, M. E. (1994). Credit insurance: rhetoric and reality (Monograph 30). West Lafayette, IN: Purdue University, Credit Research Center, Krannert Graduate School of Management. Cyrnak, A. W., & Canner, G. B. (1986). Consumer experiences with credit insurance: Some new evidence. (Economic Review, pp. 5-20). Federal Reserve Bank of San Francisco. Dobson, T. (1986). Credit insurance: The hidden insurance. Michigan Bar Journal. Ehrlich, I., & Becker, G. (1972). Market insurance, self insurance, and self protection. Journal of Political Economy, 80, Eisenbeis, R. A., & Schweitzer, P. R. (1979). Tie-ins between the granting of credit and sales of insurance by bank holding companies and other lenders (Staff Study 10). Board of Governors of the Federal Reserve System. Hubbard, C. L. (1973). Consumer credit life and disability insurance. Athens: Ohio University, College of Business Administration. Huber, J. (1978). Consumer perception of credit insurance on retail purchases (Monograph 13). West Lafayette, IN: Purdue University, Credit Research Center, Krannert Graduate School of Management.

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