What Is Collateral Protection Insurance, and Do You Need It?

man making call on smartphone after an accident
By Loren Shelton

2 minutes

The answer is likely yes, as this coverage comes into play when there is a lapse in the borrower’s insurance. 

Editor’s Note: This was originally published by State National on its blog as part of a three-part series. 

On the road of life, we all face obstacles—some we can manage, and others outside of our control. To minimize catastrophe caused by unavoidable hazards, it’s important to have security measures in place. In your personal life, daily security measures may involve wearing a seatbelt while driving or turning on your house alarm each night. Long-term security measures may involve maintaining an emergency fund or purchasing life insurance. Lenders also need to take both short- and long-term steps to minimize unavoidable hazards in their institutions.

Collateral protection insurance provides a solution by helping to mitigate the risk lenders incur when offering vehicle loans to borrowers. Because CPI can be helpful during all economic circumstances, it serves as both a short- and a long-term security measure.

Understanding how CPI works will help you decide if it is the best way to mitigate risk for your credit union. And if CPI is the best choice, this understanding will help you choose a provider that is best able to provide the protection and service you need to make your CPI program a success.

A Complex Definition Made Simple

CPI is coverage placed on a borrower’s vehicle, on behalf of a lender, when there is a lapse in insurance.

When borrowers take out an auto loan, their loan agreement usually requires that they will maintain physical damage insurance to cover the loan collateral, naming your financial institution as an additional interest on the policy. Unfortunately, not all borrowers fulfill this agreement, either never purchasing insurance or letting their coverage lapse. In fact, about one in eight drivers in the U.S. is uninsured—and, in some states, the percentage of uninsured motorists is as high as 29%.

Lenders can choose to retain the risk of loss if damage occurs to uninsured vehicles. However, just like wearing a seatbelt is a smart choice for preventing harm in an auto accident, most institutions transfer risk through an insurance program, such as CPI.

How Does CPI Work?

CPI shares similar characteristics with all types of insurance: Policies are written, and CPI insurers pay claims when losses occur. However, there are also significant differences between CPI and other types of insurance. Lenders should understand these differences when choosing a CPI program and provider.

Borrowers who do not comply with loan requirements to purchase insurance on their own will have CPI policies issued under CPI program objectives. Once a program is in place, borrowers are not individually underwritten—issuance of a certificate of coverage is guaranteed by the provider.

Because CPI placement is determined by the status of underlying insurance, CPI requires a high level of service, monitoring and management to avoid accidental lender-placed insurance. A CPI provider’s ability to quickly and accurately identify and manage a lapse in coverage directly correlates to saving a lender time and money.

Data on borrowers’ private insurance must be constantly collected and kept current to ensure that CPI placements are correctly made and that refunds are accurately issued when previously non-compliant borrowers do purchase the required insurance. This is one of the many reasons the CPI program provider a lender selects is of critical importance. An ideal CPI provider will offer borrowers hassle-free, turnkey ways to update their insurance on behalf of the lender.

Are Lenders Required to Use Portfolio Protection?

Although regulators often recommend having a portfolio protection solution in place, such a program is not required. Lenders can instead choose to retain the risk of loss if damage occurs to uninsured vehicles they repossess by self-insuring. Alternately, they can mitigate risk with portfolio protection options such as a blanket policy or CPI.

VP/Insurance Solutions Loren Shelton manages the underwriting, claims and new business implementations for a portfolio of more than six million loans at CUESolutions Bronze provider State National Companies, Bedford, Texas, a division of Markel Corporation. With more than 15 years of experience, Shelton has extensive knowledge of SNC’s collateral protection products.

Case Study: Affinity Plus FCU

A decade ago, St. Paul-based Affinity Plus FCU was going through a period of rapid growth and change. The credit union was heavily invested in external advertising to attract new members and offered aggressive loan and savings rates, nearly reaching an 18% loan growth rate by the end of 2011. Also during this time, Affinity Plus had discontinued its CPI program to save money and reduce member feedback by self- insuring — and then, when self-insuring later ended up being problematic, by taking out a blanket policy.

However, as several years passed, the credit union’s loan tracking became more and more imprecise and incomplete, and worries emerged about whether their loan portfolio was being adequately protected. See how they found a solution that lets them focus on what they do best — helping their members.

Read the full case study.
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