COVID-19 reduces current demand for collateral protection insurance; collateral loss risk likely to increase in 2021.
Unlike cyber insurance, the coronavirus crisis seems to have dampened the demand for collateral protection insurance. “It seems counterintuitive,” says Trace Ledbetter, EVP/claims services at CUESolutions provider State National, Bedford, Texas. “You’d think that in a weakening economy, fewer people would be able to get their own insurance. But it’s been the opposite.”
CPI covers a credit union’s losses when members default on a collateralized loan, and the collateral—such as a vehicle—is damaged or lost and uninsured.+
CUs typically have one of two types of insurance to protect collateral:
- “Tracked” or “force-placed” programs in which CPI is provided to the lender to cover collateral when members don’t present proof that the collateral has valid insurance. The CU may choose to add the cost of premium payments to the members’ monthly loan payments.
- “Blanket” policies provide coverage for all loans in a portfolio—regardless of whether the member presents proof of insurance coverage.
A way to measure demand for CPI is by looking at the percentage of a CU’s total number of collateralized loans for which insurance is force-placed. Ledbetter says he’s seen this percentage trending lower since the pandemic, and he suggests five reasons:
- Slow auto lending. Through Q3 2020, new vehicle sales were down 4.3% over Q3 2019, with total vehicle loan growth of only 1.2%, according to CUNA and CUNA Mutual Group—Economics.
- Temporary reprieve from some expenses. Living expenses for many Americans have decreased in 2020 and into 2021. They’re staying home, spending less on restaurant meals, entertainment, gas, etc. Also, some large auto insurers have reduced rates and issued partial premium refunds.
- Government’s economic relief benefits lowering loan delinquency rates. Stimulus checks for taxpayers, extended unemployment benefits and Payment Protection Program business loans have blunted some of the coronavirus’s economic impact.
- Repossession limits. During the pandemic, many states implemented limits on private creditors for foreclosures and repossessions of collateral.
- Traditionally strong relationship between members and CUs. CUs are more likely to work with members to avoid repossessions, leading to better payment behaviors.
Manage Increasing CPI Risk in 2021
The economic fallout of the pandemic in 2021 is likely to reverse the effects of the five factors above that have held collateral losses in check, Ledbetter says. He recommends these collateral protection strategies:
- Don’t make short-term decisions on CPI. Even if your collateral losses haven’t increased significantly early in 2021, be wary of accepting more collateral risk given the uncertain economic terrain.
- Protect motorcycles and RV loans with CPI. CU portfolios have gotten a boost from loans for recreational vehicles during the pandemic. But these are often among the first collateral types that members leave uninsured during financial downturns, and they’re highly susceptible to damage, theft and loan defaults.
Be sure it’s easy for members to confirm collateral insurance. When your CPI provider notifies members to provide proof of insurance, the members and/or their insurers should be able to use the most convenient channels, including email and text messaging, to respond.
Using a third party to administer your CPI program is a risk management tactic, but Ledbetter reminds that it’s also a point of contact with members. Handling it poorly reflects on your CU.
“Every credit union has a unique culture that members gravitate toward,” Ledbetter says. “Work with CPI vendors who will customize their contacts with your members and treat them as you would.”
Glenn Harrison writes for Credit Union Management from Stoughton, Wisconsin.