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CPI, Blanket, Self-Insurance: Which Is Better for Your Organization?

Part 2 of Our 3-Part Blog Series on Collateral Protection Insurance

At State National, we have specialized in loan tracking and portfolio protection insurance for more than 50 years. To us, the ins and outs of collateral protection are second nature — but others may be somewhat unsure of exactly what it is, how it works, and how different portfolio protection methods compare.

So, we’ve created a 3-part blog series to explain some of the nuances. In Part 1, What is Collateral Protection Insurance (CPI) — and Do You Need It? we shared a simple definition of what collateral protection insurance (CPI) is and what it does. Here in Part 2, we compare CPI with two other portfolio protection methods: Self-Insurance and Blanket coverage.

 

Every financial institution has unique needs. It is important to take a holistic approach when exploring risk mitigation options. The key questions to ask yourself when deciding on how to manage risk in your loan portfolio are:

  • How much risk can you tolerate vs. how much do you want to transfer?

  • What are your goals and objectives?

  • What do you expect in return?

Self-Insurance

Can a lender skip the trouble of finding a CPI provider and simply self-insure their auto loans? They can, but similar to not wearing a seatbelt while driving, by doing so they are increasing the risk of unfavorable financial outcomes.

Retaining the responsibility of covering financial losses due to uninsured and/or damaged collateral undermines the fundamental purpose of any insurance program, which is risk transference. The risk is even more adverse because you cannot control the status of a borrower’s insurance coverage or economic shifts any more than you can personally control how another driver may drive on the road around you.

A self-insured lender assumes all risks and absorbs any losses that occur. The greatest disadvantage of self-insurance is the volatility of earnings and that the risk is not transferred. To minimize uninsured losses, some self-insured lenders add follow-up procedures such as:

  • Requiring evidence of physical damage insurance at the time of loan closing.

  • Writing or calling the borrower when evidence of insurance is not received.

  • Writing or calling borrowers who receive cancellation notices from insurance carriers.

These procedures are time-consuming, difficult to execute without advanced technology and highly trained staff, and rarely effective without a mechanism for forced placement.

 

Blanket Insurance

With a blanket insurance policy, lenders pay a premium based on the total number of loans, typically a fixed dollar amount per vehicle or a percentage of the outstanding balance. Through a blanket policy, those who conduct business with your financial institution (either those who are also borrowers, or everyone who transacts with you, depending on how costs are distributed) must bear the cost of an uninsured borrower.

Some states do not permit the cost of blanket insurance to be charged to borrowers. In these states, the costs must be borne solely by the lender, which can serve to weaken a lender’s competitive edge in the market, especially as the best borrowers are able to choose a lender that can offer lower rates and fees because they are not building the cost of a blanket policy premium into the loan cost.

Additionally, a blanket policy is, in essence, a “cost plus” policy, with the lender trading dollars with the insurance company that must cover both the cost of claims plus the insurer’s expenses. Therefore, the direct cost of the blanket policy to the lender will continue to increase as loan business grows. The cost of a blanket policy on a growing book of business can increase regardless of whether or not a policy’s loss ratio — the ratio of claim payments lenders receive to premiums they pay — worsens.

 

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Collateral Protection Insurance (CPI)

CPI enables lenders to manage and mitigate risk by transferring the risk of uninsured collateral to an insurance provider. The program is administered by the provider only on borrowers who fail to purchase or maintain insurance.

CPI requires no individual underwriting. A borrower who does not comply with the loan requirement to procure private insurance is “written” regardless of age, driving record, or location of residence. Coverage for insurance placed in a CPI program offers your institution the same protection you would have received had the borrower maintained his or her own private insurance.

In administering the program, the CPI provider receives a file of all new loans and updates on existing loans in the lender’s portfolio and then tracks the insurance status of each loan. The provider confirms which borrowers have not provided adequate proof of insurance and sends appropriate notices alerting them to do so.

If the borrower fails to submit proof of insurance in response to these notices, the lender may then choose to place a CPI policy on the non-compliant borrower’s loan to protect the financial institution’s interest from damage or loss. They then pass 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 financial institutions little or nothing to obtain this protection.

 

Which Is Better for Your Business? Five Considerations When Determining Which Program Is Right for You

  1. Determine the level of risk your institution is willing to assume.

  2. Consider market drivers, costs, and broader economic conditions.

  3. Consider how an insurance product leverages new technology to improve administration and reduce borrower noise.

  4. Recognize the overall impact on you and your borrowers.

  5. Analyze your losses, their sources, and how they impact your bottom line.

Advantages of CPI

In addition to protecting loan collateral, there are several advantages to CPI:

  • Only uninsured borrowers pay premiums; as a result, CPI is more equitable to the lender and to those borrowers who do comply with agreed-upon insurance requirements.

  • Since CPI transfers the risk of loss to an insurance company, loan portfolio expenses are predictable, charge-off ratios are more stable, and loan business can be more competitive.

  • In challenging economic conditions, when auto repossessions (which often have damage) are increasing, blanket policy premiums can skyrocket — so the relative value of a CPI program over blanket coverage increases in direct proportion to the number of charge-offs in a loan portfolio.

  • Because borrowers who have let their insurance coverage lapse often have other financial problems, the detailed insurance tracking in a good CPI program can give a lender warning that a borrower’s credit rating may be slipping.

  • Notification of lapsed coverage presents lenders the opportunity to work with a borrower to keep the loan current and prevent losses that come with problem loans.

Read Part 1, What Is Collateral Protection Insurance (CPI)

Read Part 3, What to Look for in a CPI Provider

In Part 1, What Is Collateral Protection Insurance (CPI) and Do You Need It, we share a simple definition of what collateral protection insurance (CPI) is, what it does, and how it can benefit lenders., based on our 50 years of industry experience.

In Part 3, What to Look for in a CPI Provider, we discuss the differences between average and high-quality portfolio protection providers — and the importance of choosing the right partner for your financial institution.

If you have any questions about this article or about CPI in general, or if you would like to discuss your financial institution’s specific needs, call or email us today!

State National
State National
As the leading insurance carrier in the United States specializing in CPI, State National offers single-source solutions for credit unions, banks, finance companies, and specialty lenders of all sizes. Our services are cost-effective and tailor-made to safeguard assets against uninsured collateral losses.

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How Much Money Can We Save You? 4 Questions to Find Out

Protecting your auto loan portfolio doesn’t need to cost your credit union, bank, or finance company as much money, time, and resources as it does today. With seamless implementation and a multitude of unique advantages in our service model, State National saves lenders money. Just how much? Let’s find out! 1. How many auto loans do you have in your portfolio and how much time per week does your staff spend on managing collateral protection in your current portfolio? Our program is built to free up your staff’s capacity and provide you with FTE savings. Our exclusive lender platform, InsurTrak, has every tool you need, including: Real-time data on borrower insurance status, notifications sent, account history, insurance documentation, and all borrower interactions Instant, on-demand access to all recorded borrower phone calls. Fast, automated payment change and refund information On-demand management reports and customized, transparent reporting of all aspects of your program Created in-house and customized for CPI programs specifically, InsurTrak is the industry powerhouse in tracking, claims filing, reporting, and program management, all in one user-friendly, easy-to-use platform. “Efficient? I’d estimate State National’s system saved us 6 figures and 1 FTE!” ~ Steve McIntire, VP of Administration and General Counsel, SELCO Community Credit Union 2. What is your 12-month claim benefit? State National returns, on average, 20% more in claim dollars than other providers. Because we are the carrier, underwriter, and claims payer, there is no middleman and almost no paperwork required. Many claims are processed in 10 seconds with AI and those that need further review are paid within 5 days of their submission date. That’s 5 days start to finish. Additionally, filing a claims payment has never been easier for your team. Our claims form comes pre-populated with data from InsurTrak. You don’t even have to decide which claim type you want to file — we automatically process each claim for ALL available coverages, regularly returning more dollars to you. Did I mention we have broader coverages that provide more value to the financial institution? Not only that, but we offer a borrower-centric coverage that allows your borrower to file a claim even if they are uninsured! “State National has saved us a truly significant amount of money.” ~ John Grimes, AVP of Collections, MAX Credit Union 3. If you have a CPI provider, what is your current CPI penetration? We reduce CPI penetration by 20-30% because of our proprietary AI tracking software, proactive verification methods, and our email and text programs. Our Web-Based Robotic Automated Processing (WRAP) software automatically extracts insurance information from insurer websites and updates it in InsurTrak — without any human effort or intervention. WRAP uses AI and machine learning to proactively search for new policy information from seven different carriers, including the country’s top five auto insurers, before ever notifying a borrower. Only if we can’t verify insurance through WRAP or our other proactive and behind-the-scenes verification methods do we reach out to the borrower via multiple channels, including email and text. Borrowers can easily respond through the channel they prefer — email, phone, or our borrower-facing MyLoanInsurance.com portal. They can even send an image of their insurance information by text! All this combines to create a more seamless, frictionless experience that results in lower penetration rates and greater client and borrower satisfaction. “Even though State National provides the insurance, I know their goal in the end is to NOT have forced placements. It's an active partnership that hits from all angles.” ~ Lora Stebleton, Vice President of Payments & Customer Service, Gate City Bank 4. What core processor do you use? InsurTrak is engineered to work seamlessly with all major core processors. Because innovation is our mindset, we have multiple automation options available to accommodate your systems and processes. When designing InsurTrak, we kept software compatibility a top priority. This means seamless real-time premium adds, refunds (including partial refunds), and payment syncing. With minimal steps to set up, you can link Symitar Episys, Temenos, and AKUVO directly to InsurTrak. For those who use Symitar Episys, State National has set up two-click direct connectivity, allowing all InsurTrak data to be accessed through your Episys system. Temenos and AKUVO users can easily connect to InsurTrak within their frameworks using the State National connector. “I just don’t think anybody else out there can compete with what State National has as far as the product, the technology and innovation, and how many things are automated.” ~ Corey Rupp, Chief Retail Officer, Affinity Plus Credit Union Switch Without a Glitch Once you decide to partner with State National, our dedicated Program Implementation Team is there to guide you all along the way and answer any questions you may have during any step as you onboard. “It was the best implementation I have done with any company. It was flawless.” ~ Joy Dominguez-Mota, Department Manager, Nationwide Acceptance Want to determine the actual savings your financial institution can achieve with these advantages? Let us know your answers to these questions and see how you can take advantage of these and other exclusive benefits. Sign up for an in-depth, customized consultation and program review today to see how much time and money we can save you!