Inflation has been squeezing businesses and consumers alike.
Perhaps the easiest industry in which to spot the consequences of financial stress is the automotive industry. How can you maintain a competitive advantage while also protecting your portfolio in this market? Read on to find out.
Spotlight Soundbite: Maintaining Your Competitive Edge During Auto Industry Inflation
Consumers Are Facing Post-Pandemic Financial Stress
The government’s stimulus checks have long run out, as have the grace periods many financial institutions implemented during the pandemic. Many individuals have returned to work and are again bearing the costs of gas, transportation, childcare, and other employment-related expenses.
With many Americans increasingly financially strapped, what does this mean for lenders?
Unfortunately, prices are soaring and may continue to rise. We know that those directly impacted by inflation (which is all lower- to middle-class Americans) alter their consumption, investment choices, and spending habits as their purchasing power decreases. Something has to give as many consumers struggle to make ends meet. Unfortunately, many may choose to scale back on or even cancel their auto insurance as a result.
In addition, consumer debt-to-income ratio is expected to increase. As borrowers continue to take out large auto loans, particularly on used cars, they will be stuck with these loans even if the value of the item purchased decreases long-term — potentially putting borrowers upside down on their loans, with a vehicle worth considerably less than what they still owe in the future.
Revenue Lost in Charge-offs
What does this mean for financial institutions? Unfortunately, this financial stress being felt by consumers also increases risk in a lender’s loan portfolio. As financial institutions are providing loans for vehicles with a hyper-inflated value, it’s likely they will see an increase in bad debt as those loans start to default to historic norms and possibly higher.
Without proper risk mitigation measures in place, if the collateral sustains damage or loss when a borrower is uninsured or underinsured, the financial institution making the loan can also find itself “upside down,” so to speak, with the claims amount received insufficient to cover its exposure.
Not all is lost, however — financial institutions with a high-quality portfolio protection insurance program will experience relief from a significant amount of this bad debt. Not only will this critical protection keep your borrowers covered, it will also safeguard your balance sheet.
Insurance Tracking Also Helps Lenders Manage Risk
In addition to the protection provided by the insurance coverage, lenders can also use the detailed borrower insurance tracking in the program to assess and mitigate risk. High-quality, real-time tracking allows lenders to leverage knowledge of a borrower’s lack of coverage as an indicator of when a loan may be at a higher risk of default. This early warning sign provides an opportunity to initiate preventive steps to work with those borrowers to avoid collections, as well as take proactive measures to step up early collections efforts.
How a Program with State National Tackles Inflationary Hardships
We can help as you are undergoing a double squeeze from tighter net interest margins. In addition to decreasing your charge-offs, here are a few of the relevant ways our program supports you no matter the storm:
- Our partners have full transparency and access to immediate real-time data with InsurTrak, the industry’s only system built from scratch specifically for CPI. It’s your single sign-on source of truth for insurance tracking, claims, and reporting, resulting in maximum ease, speed, and transparency. With your loan portfolio data at your fingertips, accessible instantly all in one place, it's easy and quick to identify trends and potentially at-risk borrowers.
- Our internal infrastructure is supported by our parent company Markel, a $55 billion Fortune 500 company, which has been proudly rated “A” (Excellent) by AM Best for many decades and is regarded as an industry leader. Our combined tenure, strength, and expertise translate to unmatched peace of mind and security for our partners.
- Our Claims Advisory Recovery Services (CARS) boosts your bottom line by mitigating your auto portfolio losses, reducing your internal expenses, and giving you more time to spend servicing your borrowers. With CARS, we manage repossessed collateral and remarketing profitability at auctions for you while also maximizing settlements from outside insurance claims and recovering suspected skips.
All of this combined with State National’s culture of continuous improvement for the past half century, unwavering commitment to investment in technology, and unsurpassed service delivery ensures we can best serve our partners in both good times and challenging times, and we can help your business weather any economic storm.
Practical Solutions for Mitigating Portfolio Risks
State National's Client Advisory Council (CAC) recently discussed some practical steps their credit unions are taking for creating alternative revenue methods. Even in the face of rising inflation and decreased lending demand, there are still many ways credit unions can grow while serving their members well.
For more information on how our solutions can help your credit union, contact us!
To read the first article in this SNC Spotlight series, Tackling Inflation and the Auto Industry, visit: Protecting Your Credit Union from Car Market Volatility
