Some of them aren’t obvious at first glance.
Deciding how to safeguard your credit union's loan portfolio can seem like a complicated decision, and it can be tempting to go with the option that seems easiest on the surface. However, as with most things in life, there’s a lot more underneath it all than meets the eye.
Why a Tracked Portfolio Protection Program Is Better for Credit Unions
Lack of member insurance tracking has some risks that aren’t always obvious at first glance:
1. Increase in uninsured collateral and risk to the credit union. Tracked programs encourage non-compliant members to obtain their own insurance and the right kind of insurance—and to keep it in force. Considering that an average of 1 in 8 drivers in the U.S. is uninsured—reaching as high as 1 in 4 in some states—lenders whose programs don’t have a tracking component often find that the number of uninsured members within their portfolio increases because there is no mechanism to resolve deficiencies.
2. Loss of claim dollars from standard insurance carriers. Without a tracked program, nothing ensures a member will add your credit union as lienholder and loss payee—which means that if a covered loss is incurred, the claim payment goes directly to the member. Unfortunately, sometimes the member pockets the money instead of repairing the collateral, and there is no protection for the lender when this occurs. Tracking lienholder status is essential to ensure that if you need to repossess the vehicle, you will be compensated for the damaged collateral.
3. Increased charge-offs. Without the claims benefits a tracked program provides, your credit union will likely see an increase in charge-offs. A tracked program can reduce charge-offs by as much as a third, which means credit unions can see an increase of as much as 50% in charge-offs when they move from a tracked program to another form of insurance.
4. Negative impact on overall membership. Tracking your entire portfolio and placing a policy only on those who do not have acceptable insurance benefits your whole membership. The average penetration rate (percentage of policies placed relative to the entire portfolio) of a tracked program is very low, so the vast majority of your members who keep proper insurance coverage in place are not affected. Plus, reducing charge-offs and keeping your portfolio’s uninsured rates low also helps your lending rates stay more competitive because your credit union does not need to cover these charge-off costs (or premium costs for a blanket policy).
5. No protection of uninsurable members. In some cases, members are unable to obtain their own insurance due to poor driving history or other circumstances. A tracked program offers the ability (at the credit union’s discretion) for physical damage coverage to be extended to these members. That way, they can have the vehicle repaired and can continue driving it, enabling them to keep working and making their loan payments.
6. Loss of an early indicator of future delinquencies. When a member drops insurance coverage, it can be a red flag indicating possible future delinquencies. A tracked program can allow your collections department to be aware of potential future repayment issues so they can work proactively with the member to find ways to keep payments current. Early identification and action also reduce the risk posed by the diminishing value of the collateral—because early detection helps identify vehicles that need to be repossessed while the collateral still holds value, as opposed to later on when that value could drop significantly.
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.