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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.

 

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 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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The Difference Is in the Details: Secure Texting

State National’s Partnership With Solutions by Text Is a Secure Way To Reduce Borrower Noise    When was the last time you wrote or received an office memo? Or had stamps handy to mail a letter? Have you dialed the operator to make a phone call lately? Or eavesdropped on a party line? Some of you may have never experienced these “old school” methods of communication — and although each of these had their charms (eavesdropping on your neighbors over a party line was sometimes just as entertaining as watching drama unfold on General Hospital!) you should probably consider yourself lucky that those days are mostly behind us. Communication has evolved to become faster, easier, and far more convenient over the years, and here at State National we are no stranger to the incredible efficiencies technology has gifted us.     Whether business or personal, emails and texting have drastically altered how we connect with each other and share information. 89% of adults check emails daily and 98% of all text messages are read within three minutes! (When was the last time you checked yours?) Both are instant and can be read and responded to at the convenience of the recipient as opposed to interrupting them with a phone call, which many people report causes them a certain amount of anxiety nowadays. Both email and texting is where it’s at these days, and each have their particular strengths. While emails can provide a little more space to respond at leisure, texts create a sense of urgency. Receiving a communication from another channel also helps reassure borrowers of the authenticity and validity of the message by adding another touchpoint communicating what is needed.   Adding Email Notifications In 2016, State National implemented email notifications to borrowers as part of the notice cycle. This provided a quick and efficient way for borrowers to respond with their insurance information through the MyLoanInsurance.com website or by replying to the email with their insurance information. On average, we saw 23% of borrowers log into MyLoanInsurance.com from the email. Considering that 2% to 5% is considered a good click-through rate for email, this result was an immediate success.   Next, Text Messages Then, in 2019, State National added text messaging to the notice cadence to further increase ease and convenience for borrowers while also instilling an urgency to submit their insurance. Like our email notifications, these text messages have a secure link into the MyLoanInsurance.com website a recipient can effortlessly access from their smartphone — which, let’s be honest, is always inches from their fingertips at any given moment. So far, we are seeing an average of 18% of borrowers log into MyLoanInsurance.com from a text they’ve received and we expect that number to continue to climb. Overall, of those who log into MyLoanInsurance.com from the email or text, over 70% are submitting their insurance!     But Is it Secure? Of course, scams and phishing are unfortunately a reality and very prevalent in the world of emails and texting and, rightly so, have everyone on high alert. Let’s face it, receiving a text asking you to provide your insurance information may cause some hesitation, but then when you receive an email a few days later, you start to think it may be legit. Then you receive the notice in the mail. OK, the recipient thinks, now I know this is my financial institution trying to get ahold of me to get this information. We want your borrowers to feel at ease that their information is protected. That’s why we include your financial institution’s logos on the emails and on the secure MyLoanInsurance.com website. If you’re a client of State National or thinking of becoming one, putting the MyLoanInsurance.com website on your loan documents or even on your website can help reinforce the authenticity with your borrowers.   The Proof Is in the Results So how does all this translate to your CPI program? Well, we have found that clients who utilize our email and texting programs are experiencing an average penetration that is 34% less than before they added these enhancements to their program. In addition, the "flat cancel" rate (the percentage of certificate placements resulting in a full refund) has decreased as much as 11%. That means fewer unnecessary certificates placed and refunds processed — which translates to less work for your staff.   The Difference Is in the Details State National’s texting and email programs are completely free of charge and State National does all the heavy lifting for you. You simply provide us the email addresses and phone numbers associated with the loans and we’ll take it from there — only reaching out to borrowers we haven’t yet received insurance information from. Should one of your borrowers no longer want texts, they can easily reply STOP and they’ll immediately be opted out, with their opt-out immediately reported back to your financial institution. We’ve worked diligently with outside legal counsel and partnered with Solutions by Text, a compliance-first provider of enterprise texting solutions with a proven track record with the FCC, TCPA, FDCPA, CFPB, CTIA, and MMA to ensure that our program is fully compliant. And since there is no advertising of a product or service, our emails are exempt from the CAN-SPAM Act. We continue to closely monitor any and all regulations surrounding these programs so you can keep peace of mind.   See what our partner Solutions by Text has to say about financial services users and texting!   There’s no doubt that the borrowers we serve are enjoying the convenience — and responding to these more modern ways of both receiving and sharing information. Who knows what the future holds for even better communication techniques? Whatever it is, you can count on State National to be ahead of the pack in offering it to our clients!

How to Explain CPI to a Borrower, Part 2: Simple Answers to Common Borrower Questions

CPI expert and Sr. Client Executive Kathy St. Clair shares her insights on how to educate borrowers about CPI and what to say if a borrower has questions about a CPI certificate placed on their loan. In Part 1, Equipping Your Staff, she shared the value of informing borrowers proactively and the multitude of resources and support State National has available to assist you. If you do not know what CPI is, we recommend first reading What Is Collateral Protection Insurance (CPI)?   Borrower Questions Covered in This Article Will I receive a refund once I show proof of insurance? I submitted my insurance, but have not received a refund Can I keep CPI as my only car insurance if I want to? How do I rectify my insurance status? Can this insurance be refunded? While you can redirect a borrower to State National at any time to be helped by one of our friendly, highly trained team members, we want to share the answers to some common questions a borrower may ask so you and your staff feel prepared to answer anything.   Borrower Questions: "Will I receive a CPI refund once I show proof of insurance?" "If I go out and get insurance, can I be refunded for what I have paid for CPI so far?" "Will I still have to pay a premium on my loan each month once I show proof of insurance?" Once State National receives proof of insurance, a refund is quickly processed and sent back to your financial institution. If the borrower had adequate insurance for the time period in question, a full refund will be issued. There may be a charge for any verified lapses in coverage. How quickly we can issue a refund will depend on the agreed-upon process, such as ACH or manual check. The refund is then posted to the borrower’s loan. In many cases, this can be done through an automated process, eliminating any manual administration for your staff. Along with quickly processing a refund, we send a notice to the borrower to let them know that their refund was processed.       "I submitted my insurance — why haven’t I received a refund?" or "Why am I still receiving notices?" This is where InsurTrak can once again come to your aid. If InsurTrak indicates that we have sent a borrower an impairment notice, you can let them know that we did receive their insurance but that the information they sent us was not complete. Through our tracking, we are making sure the borrower provides full-coverage insurance, both comprehensive and collision, with you listed as lienholder. Making the borrower aware of this can help them understand what additional information they need to submit for quick rectification.   "Is CPI considered insurance? I may want to keep CPI because it is cheaper and more convenient than my previous insurance." "Can I keep CPI as my only car insurance if I want to?" Some of our CPI partners have shared that borrowers occasionally ask about keeping their CPI insurance instead of purchasing their own auto insurance. A borrower should understand that CPI is not an equal alternative to car insurance they can buy on their own. By educating a borrower on what CPI is, you can deter them from keeping CPI. CPI is meant to cover only the cost financed by you as a lender — it is intended to protect your loan portfolio, not the borrower. While CPI provides comprehensive and collision coverage on the automobile, it does not cover the driver. CPI will not assist a borrower in covering any damages to another individual’s property. Most states also require drivers to carry liability insurance in case an accident occurs and there is another party or property damage involved.   Not realizing the specifics of their insurance, a borrower with CPI coverage will sometimes return to their lender after an accident or other loss and ask for a copy of the policy. You can let them know that even though the insurance policy is mainly there to protect the lender, and excludes damages outside of their vehicle, if they have damage to their own car they can file a claim so that they will remain in good standing on their loan. If they are not delinquent by more than 45 days, we will accept a claim directly from the borrower to repair that collateral and get them back in the driver’s seat. Please encourage your borrowers to get and maintain their own insurance.     "How do I rectify my insurance status?" "Can this insurance be refunded?" The quickest way a borrower can have a CPI certificate removed is to submit proof of insurance to their lienholder — your financial institution — or directly to State National. We use a variety of methods to collect borrowers’ insurance on your behalf, and we make it as simple as possible for them to comply. Options for borrowers to provide evidence of insurance include calling into our Contact Center, or mailing, emailing, or faxing their Declarations Page to our Service Center. But text and email notifications are the fastest and most convenient way for a borrower to provide us with insurance. Each text and email notification we issue includes a link that takes the borrower directly to our self-serve portal, MyLoanInsurance.com, where they can easily upload a copy of their insurance information. This portal features notice-specific videos walking borrowers through their solutions for verification. Alternately, they can choose to reply to the text or email with an image of their coverage details. Borrowers also have the option to provide us with their insurance company name and policy number, and we'll reach out for verification on their behalf. Our goal with this multichannel approach is to make it as easy as possible for borrowers to submit their information in the way that is most convenient for them.   Informed Staff Deliver a Better Borrower Experience All staff members who handle loans at your institution should have a basic understanding of what collateral protection is doing for you and how it works. We offer ongoing training and resources to your staff members. Your staff should also understand the premise and benefits behind the product — mainly, that it is there to protect your financial institution against uninsured losses. Here are some additional resources to build your knowledge about CPI: Short State National Animated Company Explainer Video What Is Collateral Protection Insurance (CPI)? Understanding the Differences Between CPI, Blanket, and Self-Insurance Remember, your financial institution’s dedicated Client Executive is here to help you with any of your CPI questions or needs!   To read the first article in this SNC Spotlight series, visit Part 1, Equipping Your Staff  

How to Explain CPI to a Borrower, Part 1: Equipping Your Staff

At State National, we recognize that collateral protection insurance (CPI) is not a term every borrower knows. Here, CPI expert and Sr. Client Executive Kathy St. Clair shares her insights on how to educate borrowers about CPI and what to say if a borrower has questions about a CPI certificate placed on their loan. If you do not know what CPI is, we recommend first reading What Is Collateral Protection Insurance (CPI)?