Understanding how CPI works will help you decide if it is the best way to mitigate risk in your credit union.
On the road of life, we all face obstacles. Some we can avoid with careful planning, and others are outside of our control.
In your personal life, minimizing catastrophe may involve wearing a seat belt while driving or purchasing life insurance. For credit unions, there are also ways to avoid known hazards and minimize damage from the unavoidable ones.
One pothole CUs can easily bypass is risk of loss from damage to uninsured collateral. The most effective method for this is CPI: collateral protection insurance.
CPI helps mitigate the risk credit unions incur when offering vehicle loans to borrowers. Because CPI can work during all economic circumstances, it serves as both a short- and long-term security measure.
Understanding how CPI works will help you decide if it is the best way to mitigate risk in your credit union. It will also help you choose a provider that is best able to provide the protection and service you need to make your credit union’s 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 taking out an auto loan from your credit union, borrowers agree to maintain physical damage insurance to cover the collateral, naming your credit union as an additional interest on the policy. Unfortunately, not all borrowers will fulfill this agreement, either never purchasing insurance or letting their coverage lapse.
Credit unions can choose to retain the risk of loss if damage occurs to uninsured vehicles. However, just like wearing a seat belt 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 applies only to borrowers who don’t purchase or maintain insurance—making it a fairer choice for members who are properly compliant with insurance requirements.
If a borrower doesn’t submit proof of insurance in response to multiple notifications from the CPI provider, the lender may choose to place a CPI policy on the loan to protect the credit union’s interest from damage or loss. The lender then passes the cost to the borrower by adding the premium to the loan balance. The charge is removed as soon as private coverage is reinstated. It costs your credit union little or nothing to obtain this protection.
CPI requires no underwriting, and CPI coverage offers your credit union the same protection it would have received had a borrower maintained private insurance.
The Importance of Choosing the Right Protection
Because CPI placement is determined by the status of underlying insurance, an effective CPI program requires a high level of service, monitoring and management. Data on borrowers’ private insurance must be constantly collected and monitored to ensure that CPI placements are correctly made and that refunds are quickly and accurately issued when the required insurance is obtained. An ideal CPI provider will offer borrowers hassle-free, turnkey ways to update their insurance through multiple channels, including email, text and online through a convenient, borrower-specific web portal.
A combination of highly effective tracking technology and personal, customer-focused service helps ensure that all placements are made accurately, refunds issued promptly and requests handled expediently. This minimizes work for credit union staff and provides the best member experience.
While it’s impossible to avoid all risk—other than by stopping writing loans altogether—a high-quality CPI program can help your credit union mitigate its institutional risk while minimizing borrower noise and protecting your member relationships.
Loren Shelton is VP/insurance solutions of CUESolutions Bronze provider State National Companies, Bedford, Texas, a division of Markel Corporation. He manages the underwriting, claims and new business implementations for a portfolio of more than six million loans. With more than 15 years of experience, Shelton has extensive knowledge of SNC’s collateral protection products.