Use a holistic collateral protection insurance program.
It’s no secret that economic turbulence is impacting both borrowers’ financial lives and credit unions’ portfolios. A perfect storm has been brewing since 2020, and it’s the convergence of historically high vehicle values, low interest rates, and borrowers benefiting from stimulus payments. These conditions were followed by high vehicle prices, inflation and soaring interest rates, turning the tides—and spiking the risk—related to uninsured collateral.
How Did We Get Here?
When the pandemic hit in early 2020, interest rates were low, as were vehicle and home prices. As it became evident that the pandemic would be ongoing, forbearance programs and stimulus payments came into effect. Many insurance providers offered grace periods for payments while keeping coverage in place.
Now, as repossession moratoriums have lifted, stimulus payments ceased and interest rates soared, portfolio risk is spiking. We are facing a significant shortage of repossession vendors to handle the upcoming surge in demand, meanwhile vehicle values continue to plummet, and insurance premiums are rising.
Car Insurance Premiums Are Rising
What does this mean?
Unfortunately, as insurance premiums rise, borrowers are less likely to maintain coverage on their vehicles. In fact, at Allied Solutions, we saw a 16% jump in cancellations from mid-2020 to mid-2022, indicating greater financial risk for uninsured collateral. There is significant risk involved if insurance is canceled and new policies do not contain the financial institution as the lienholder. Or, in worst-case scenarios, no coverage is obtained at all.
A Holistic Approach to Managing Uninsured Collateral Risk
Credit unions are mitigating the rising uninsured collateral risk by partnering with industry experts who track insurance statuses and place lender insurance only when necessary.
A holistic approach to collateral protection insurance incorporates insurance tracking, borrower communication strategies and coverage as a last resort to insuring the collateral. A holistic CPI program will do the following on your behalf.
1. Identify borrower risk. Before communicating with borrowers for insurance verification, it is helpful to identify low- and high-risk borrowers. Not all borrowers contribute the same amount of risk to your portfolio. In fact, only about 8% of borrowers don’t verify insurance on their collateral. Harnessing the power of data can provide predictive analytics to pinpoint lower- and higher-risk borrowers.
Lower-risk borrowers typically obtain insurance but may neglect to add the lienholder. On the other hand, higher-risk borrowers typically neglect to obtain coverage at all.
Once the level of risk is identified, the insurance verification communication strategy can be modified. For example, a lower-risk borrower would receive fewer notices than a higher-risk borrower. These notices can be in the form of mailed letters, texts or emails.
2. Integrate self-verification options. Providing multiple avenues for self-verifying insurance can encourage borrowers to provide proof of coverage on their own. Empowering borrowers to verify their coverage reduces false place, lender placement, of insurance on already insured collateral. These self-verification invitations could be a customized video message at the time of loan onboarding, or an email linking to MyInsuranceInfo.com, an easy-to-use online platform where borrowers can provide their insurance details, including lienholder information. Encouraging borrower-led verification can find insurance already exists on collateral and further reduce borrower touchpoints and false placement.
3. If needed, place insurance. A holistic CPI program incorporates borrower communication strategies with lender-placed insurance. The goal is to protect both borrower and portfolio. If insurance status cannot be verified and the borrower has not responded to verification attempts, lender-placed insurance is applied to the collateral. This coverage should include claims management and robust support. Look for a provider that offers flexible coverage and program options that best fit your financial institution’s unique needs.
If you aren’t already protecting your portfolio with CPI, it’s particularly critical to return to the basics of a collateral protection program. Take a holistic, seamless approach to collateral risk management with a comprehensive program that protects your portfolio and borrowers.
Anne Holtzman is SVP/risk management at Allied Solutions, a CUES Supplier member. In her current role, she is responsible for internal product development and identifying and developing partner vendor strategies that provide risk management solutions to all facets of lending institutions. She has over 30 years of experience in the insurance industry, serving in various executive-level positions for both the personal lines automobile insurance industry and now in a service support role for financial intuition clients. Holtzman has strong recovery expertise in areas of repossession, total loss, and GAP claim adjudication. Allied Solutions, LLC is one of the largest providers of insurance, lending and marketing products to financial institutions in the US. It uses technology-based products and services customized to meet the needs of over 4,000 banks and credit unions, along with a portfolio of innovative products and services from a wide variety of providers. The company maintains over 10 regional offices and service centers around the country and is a subsidiary of Securian Financial Group, Inc.