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The Canary in the Coal Mine: Does Collateral Protection Insurance Cause Defaults — Or Prevent Them?

Worried the CPI on a borrower’s loan might increase the likelihood of default? Good news – it’s actually an opportunity to protect your member.

Protecting loan collateral is crucial for lenders, especially in uncertain economic times. Collateral protection insurance (CPI) programs are a proven way to provide protection for financial cooperatives with a limited appetite for risk.

However, some credit unions might hesitate to use CPI programs because of concerns the added cost could push troubled borrowers over the line into delinquency or default.

Loren Shelton, longtime Vice President of Insurance Solutions at State National Companies (SNC), argues instead that the reality is many of those loans would end up in default with or without CPI placement and a well-run program can serve as a “canary in a coal mine.”

According to Shelton, early warning can help credit unions demonstrate their deep commitment to providing affordable and sustainable products and services to their member-owners by engaging troubled borrowers who could otherwise fly under the radar until it’s too late.


Here, he elaborates:

Why would a credit union hesitate to protect its bottom line by using CPI placement?

Loren Shelton: Some lenders might initially hesitate to institute a collateral protection insurance (CPI) program to protect their loan portfolio — even though most of their losses and charge-offs come from uninsured borrowers — because they wonder if adding CPI to a member’s loan balance will make the loan more likely to progress to delinquency.

In fact, although it might seem counterintuitive, CPI certificate placement more often serves as a warning signal of a loan already in or headed toward distress and offers the credit union opportunities to work with members to avoid default, save the credit union from charge-offs, and strengthen member relationships.

How does adding cost to a troubled loan strengthen member relations? And what do you mean by “a canary in a coal mine?”

LS: That’s an old axiom from before there were advanced sensors and electronic equipment protecting underground coal miners. Dangerous gases are often odorless, so it’s said miners would take a bird like a canary into the coal mine with them. Birds are highly sensitive to oxygen levels, the thinking went, so if the canary died in its cage, it was an early indicator of trouble and time to get out.

With CPI, when you have an uninsured borrower, first you try everything you can to change their behavior and encourage them to get insurance. That’s why there’s a multi-touchpoint, multichannel notification cycle — you really do want these members to get insurance to protect both themselves and the credit union. However, if they don’t, eventually you need to place a policy and add that premium to the loan to protect your collateral.

That’s also your opportunity to engage those members and do what you can to help, whether through financial counseling, loan modifications, or a grace period — all those things credit unions are so good at doing. It’s up to you, but you can’t help if you don’t know what loans are uninsured and possibly heading for trouble.

How does SNC’s technology make your verification processes faster and more efficient?

LS: In the old days there were only paper notices, and if borrowers missed or ignored the notices, that was all we had to go on. But with as many points of contact as we make these days — including paper mail, email, and text messages — anybody who has gotten through that notice cycle and is up to the point of having a certificate placed, more often than not, they don’t have insurance.

There are still those situations where people do have insurance and don’t respond, and we end up canceling the CPI and refunding all the premium. But that percentage has gone way down since we started our AI automatic verification process where we use our bots to go into insurer websites to verify whether someone has insurance.

All these processes we’ve added for proactive verifications have helped us greatly reduce the number of flat cancels we have. That’s good for the credit union because we touch fewer of its borrowers that way.


Watch: SNC Spotlight Soundbite — Early Warning Sign of a Loan in Distress


But what about the added cost to the loan? Doesn’t that push some loans into delinquency and then default?

LS: There’s some amount of truth to that. In a small minority of cases where someone was already having trouble, this hypothetically could be what puts them over the edge. The other piece to that is you can’t prove a negative. If what didn’t happen didn’t happen, then there’s no way to prove it would’ve happened regardless.

Our position has always been that in the vast majority of cases, CPI causes a change in behavior in borrowers. And we see that by the number of certificates that get placed that wind up with borrowers going out and getting their own insurance.

We know CPI drives that change in behavior. That’s a good thing for the borrower and it’s a good thing for the credit union. Everyone winds up having better protection instead of the credit union having better protection than the borrower. It’s a win-win in those circumstances.

How can credit union leaders learn more about CPI programs and how they compare to other options such as self-insurance and blanket insurance programs?

LS: SNC has more than 50 years of experience with these programs and is here to help you work through your options and decide which is best for your cooperative. Check out our white paper on the pros and cons of different options. You can also contact us by phone at (817) 265-2000 or online here.

*State National is a preferred partner of Callahan & Associates. This article first appeared on


Loren Shelton
Loren Shelton
Loren Shelton has been with State National Companies (SNC) of Bedford, TX, for 24 years, the past five as Vice President of Insurance Solutions. In that role, he manages underwriting and claims for a portfolio of more than six million loans. He previously served as Senior Accountant, Assistant Controller, Underwriting Manager, and Underwriting Director.

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The Canary in the Coal Mine: Does Collateral Protection Insurance Cause Defaults — Or Prevent Them?

Worried the CPI on a borrower’s loan might increase the likelihood of default? Good news – it’s actually an opportunity to protect your member.