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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 nearly 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.

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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.

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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.

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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.

Collateral Protection Insurance (CPI)

Icon_UmrellaCPI 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.

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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? Six Considerations When Determining Which Program Is Right for YouAdobeStock_164646576

  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

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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.


In Part 3, “What to Look for in a CPI Provider,” we will 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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Taking the Quest for Feedback to the Next Level In 2018, we went a step further and created the State National Client Advisory Council (CAC) to convene a group of some of our top clients to discuss issues that are critically important to them and to us. It’s a forum to share information, gain consensus on key topics, and collaborate with peers and partners to creatively pursue problem-solving strategies and growth opportunities for their institutions As I said in my last CAC blog, our intention in establishing the State National CAC was, and still is, to listen carefully to the voices and concerns of our clients, foster an atmosphere where collaborative insights can emerge, and allow our strategy and product development to be guided by those who will actually be using it every day. Specifically Designed to Add Value — For All Yes, the CAC is of great benefit to State National, because it gives us opportunities to deepen relationships with some of our closest partners, and align our organization more precisely with our clients’ perspectives. We get to hear both what’s working well as well as challenges they’re facing, not only in our area of expertise, but in all areas of their institution. As we’ve been known to say a time or two, we’re successful when our clients are successful — so anything we can contribute to help them grow and succeed ultimately contributes to our own success as a company. But it’s definitely not all about us! Our council was created with a true desire to provide members with tangible, real-world benefits that not only make it more than worth their time but also add tremendous value they don’t get from any other partner. But don’t take it from us — here’s what some of our current CAC members have to say: “By having open conversations about what’s going on in the marketplace with other credit unions who are going through the same things, I’m able to learn how others are attacking certain problems and I’ve absolutely taken some things back to my credit union and implemented them.” ~ Mike Shockley, VP of Lending, True Sky Credit Union, Oklahoma City, OK “It’s great to talk about emerging technologies or other ideas we can bring back to our specific credit unions and share with our leadership team — ideas we might otherwise not have been exposed to. The volume of information at a very high level that someone can obtain by joining the CAC is wonderful." ~ John Cotner, VP Lending, Horizon Credit Union, Boise, ID “When it comes to topics like innovation and technology and AI, I think I've learned more from the CAC than I have by going to conferences and things like that, because you can really have more intimate conversations with your peers at the council, and State National does a great job of bringing in great presenters that really position the topics well, so it's easily understood as we're reviewing certain new innovations.” ~ James Bolin, SVP & CMEO, Silver State Schools Credit Union, Las Vegas, NV “One of the benefits of being on the CAC is not only meeting some of the participants from different parts of the country and having discussions, but I have also been able to take away two specific strategic business initiatives that directly impact the credit union that came about through my participation on the CAC, including one that is a multi-year strategic initiative.” ~ Steve McIntire, SVP, Enterprise Risk & General Counsel, SELCO Community Credit Union, Eugene, OR State National is a great partner. I'm glad they asked me to join the CAC because it gives me an opportunity to keep that partnership active and very vibrant. And I enjoy the fact that I get to see what State National is doing and what’s on their horizon and how it’s going to benefit not only my credit union, but the credit union industry. So it’s been really awesome.” ~ Karen Hoeppner, Chief Lending Officer, My Credit Union, Minneapolis, MN A Real-World Example of CAC Value The council’s 3rd quarter 2021 meeting provides an illustration of the tangible benefits of this ongoing collaborative sharing of ideas and insights. The council met in August in Irvine, California, headquarters of Filene Research Institute. Filene is an integral thought leadership partner for State National, and that partnership further extends directly to our CAC members. The business portion of the event was held at Filene’s innovative West Coast outpost. 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