It was a year ago when Jon Brown knew his dealer group’s approach to credit life and disability had to change. The former F&I director for Auffenberg Dealer Group’s Ford store in St. Louis believed in the products and knew scrapping them wasn’t the solution. His answer would come to him while watching a commercial with Aflac’s famous duck.

“It occurred to me that life insurance is life insurance. If the customer doesn’t want it, you’re not going to talk him into it,” said Brown in August. “So I sell disability and I present it like Aflac. Everyone’s familiar with that, so I tell them, ‘I know this says disability, but it’s more like Aflac for your car.’ Then I give them the pitch.”

Brown, who now serves as general sales manager for the store, would first pitch his cheapest policy, Protective’s 14-day policy with a six-month cap. Before changing roles, his acceptance rate averaged between 25 and 29 percent, and even hit a high of 32 percent in August. By the end of September, Brown said four out of the nine F&I managers at his dealership were running over 25 percent penetration on credit life and health, one even reaching as high as 29 percent.

“Penetration went through the roof,” said Brown. “Our 29 percent guy had around 70 touches, so this isn’t a flash in the pan.”

Like Brown, many dealerships are reconsidering their approach to the category that put the “I” in F&I. Some dealers even wonder if credit insurance products have lost their place in the industry. Insiders say state regulations have hampered the growth of the category. Others say it’s the demographics of an area that limits its reach, which Auffenberg’s Brown doesn’t agree with.

“Pick the worst market to sell these types of products and that would be the market I’m in,” he said. “Eighty percent of the workforce in my area is in the military, and those guys have great life insurance and paid sick time. So I don’t really buy into that. I think it really comes down to the presentation.”

Consumer Market Big, Interest Low

What’s clear is the lack of consumer interest in products like life insurance isn’t regulated to automotive retail. In a 2007 survey conducted by the Life and Health Insurance Foundation for Education (LIFE), one in five Americans said they’d prefer to have a root canal than investigate their life insurance needs.

That sentiment exists at a time when buying most types of life insurance has either remained stable or dropped over the last decade, according to LIFE’s 2008 survey. Yet, only one out every 10 Americans said they have not purchased coverage because they believe it’s too expensive.

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As for disability, more than 100 million Americans don’t have disability income insurance, according to the Council of Disability Insurance. Even worse, A.G. Edwards Inc.’s National Investment Survey revealed that 72 percent of Americans don’t have enough savings to meet even short-term emergencies. The problem is Americans are saving at the lowest rate since the Great Depression, according to the Commerce Department.

“People in our country have not been good about saving … they’re overextending themselves with credit,” said Ed Kizer, president of Central States Health & Life Co. of Omaha (CSO). “The truth of the matter is it’s this time in particular when the fundamental need for the product is as good as it’s every been. Some dealers believe that, others choose not to see it.”

Blue Collar Product

One dealership that’s chosen to believe in the product is Sewell Ford of Odessa, Texas, which offers CSO’s life and health insurance. “I went to NADA (National Automotive Dealership Association) a few years back and they talked about how life and disability was a product that was fading away,” said Chris Garrett, finance director for the dealership. “The product is still relevant, and dealerships need to focus on what’s valuable to the customer. And let’s not forget what got us here.”

Sewell Ford’s penetration rates are staggering, with a 38 percent acceptance rate on life insurance. One F&I manager even has a 68 percent penetration rate on life and 57 percent on disability.

“In West Texas, where it’s a blue-collar oil town, there are still people with not enough life insurance,” said Garrett, whose dealership employs Reahard and Associates for training. “And workman’s compensation doesn’t kick in for 90 days. By that time the bank is looking for your car.”

Being in an oil town, Garrett’s success isn’t surprising. In fact, most statistics point to higher penetration rates coming out of towns with a high concentration of blue-collar workers.

“It really depends on the dealership and its geographical placement,” said Richard S. Kahlbaugh, president and CEO of Fortegra Financial, formerly known as Life of the South. “Some areas it does well in, others it’s not a viable product. It really depends on the dealership, their history and the territory.”

Kahlbaugh said dealerships in southern states do OK with the product, as do dealerships as far west as Mississippi and Texas. The product does do well in the Midwest, and the Northeast is fairly flat. The worst place to sell the product is California, he said.

“This product does very well for those people in middle America,” said Kahlbaugh. “Often times, this social economic group can’t find a $50,000, five-year term policy that’s priced affordably. And that’s the market we target — the underinsured.”

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Regulations a Big Hindrance

While providers might be targeting Middle American, it’s been regulations that have guided them there. “Credit life continues to go through tremendous scrutiny,” said Kahlbaugh. “Our rates and our commission structures are reviewed regularly by state insurance departments.”

According to CSO’s Kizer, regulations have thinned out rates in Arizona and the state of Washington. California is also a difficult state for the category, and most providers choose not to write in New York because of its challenging regulatory requirements.

“That’s the toughest challenge in keeping these products on the menu, making sure it provides enough income,” said Kizer. “Yet, when you talk about lenders, they’ll look for certain core products that are good for the borrower, the lender and the dealer. These products fit that description.”

The regulatory scrutiny that’s fallen on the product category dates back to the late ‘90s. The problem involved a consumer’s ability to cancel a policy originated at car dealerships.

“If the loan was originated by an indirect lender, they didn’t always know credit life and disability insurance was on the loan,” said Kizer, who said the problem originated in five states, Georgia, Minnesota, Vermont, New Hampshire and Texas. “We dealt with this in the late ‘90s, and we had to refile many of our forms to acknowledge the indirect part of the business.”

Downsizing an Industry

The regulatory attack on the product category would lead to a significant change in the landscape, marked by a massive downsizing of the industry. In CSO’s case, the company contracted with companies like JM&A, Zurich and The Warranty Group to handle their credit insurance products. This added more than 900 dealers to its customer base and forced CSO to concentrate its efforts solely on credit insurance.

“We knew credit insurance was going to be challenged in several states because of refund problems and litigation, which forced many companies out of the business, especially those with other product lines,” said Kizer. “For many years, Central States was solidly in the top 20 carriers in the industry, around fifteenth or seventeenth on the list by volume. Last year we moved up to 10 and this year we expect to come in at seven.”

The consolidation of the industry has also led to growth for Fortegra Financial, which had 85 percent of its issued and outstanding shares purchased by Summit Partners in June 2007. Five months before changing its name from Life of the South, the company acquired Gulfco Insurance Services Inc., Gulfco Life Insurance Company and two subsidiaries of Protective Life Insurance Company. The acquisition gave Fortegra a big footprint in Louisiana, which is now the company’s second-largest state for credit insurance production.

Also under the Fortegra umbrella are North Carolina-based American Guaranty Insurance Co. and Triangle Life Insurance Co., both of which were acquired in June 2006.

“The consolidation in this industry is like any industry … it goes through cycles where there is consolidation, but it’s a tough proposition because people are coming to dealerships to buy a car leery of the economy and leery of over spending ... even though there’s a clear need for credit insurance these days,” said Kahlbaugh. “And there’s no shortage of suppliers for dealers who want the product.”

Kizer added that the current economy isn’t stopping credit unions and banks from offering credit insurance. “A good piece of our business is sold by banks and credit unions,” said Kizer. “We’ve seen situations were credit unions will have a kiosk that can produce loans and 30 percent of the people would get credit insurance … and that’s without trying. Imagine what dealers can do with just a little bit of sales expertise.”