Thinking About Alternatives to CPI in Today's Economy?

You May Want to Think Again!

I have been in the collateral protection field for over 36 years, through all kinds of economic conditions and circumstances. For more than 14 of those years, I have been a Client Executive for State National Companies, where my job is to work with our client partners to maximize the effectiveness of their portfolio protection.

To do so, I provide training and education on the most efficient way to run their program, problem-solve any issues, help customize features to provide the most benefit to the credit union and its members, and keep close tabs on the health of the program, rebalancing and making adjustments when needed.

Taking a Long-Term View Amidst Competing Demands

Over all my years in the business, I have seen firsthand how the right kind of collateral protection program can protect credit unions from risk when times are good, as well as when times are more challenging.

In working with my credit union partners, I also understand that in today's world of economic uncertainty, CU decision-makers are faced with a multitude of tough choices. They have to juggle competing demands in so many areas: technology enhancements, member service, risk mitigation, growth, staffing, and so much more.

"What can I do to make things easier? Should I change something?"

Faced with what seems like challenges from every angle, clients sometimes tell me they want to explore alternatives to CPI. That's often because in more turbulent economic times even the best CPI program in the world is likely to experience some increased friction. But that's not because there's anything wrong with the program — it's actually because the program is working like it's supposed to!

Are you seeing an increase in member calls, and maybe increased CPI penetration in your portfolio? Exactly — and this makes perfect sense considering today's market conditions.

More borrowers are feeling strapped, and they're raising deductibles, dropping coverages, and even totally canceling their insurance with more frequency than had been the norm previously. Those extra calls and certificates? They're not a sign that something is wrong — they are reflecting how your tracked program is PROTECTING your credit union from loss.

Still, I understand why it can be tempting to hope that making a change will make things easier. In the short term, I understand how it can seem like a solution to any extra noise your program may be generating. 

Unfortunately, what it does is create a much larger — and ultimately very expensive — problem down the road that will negatively affect both you and your members in a much more detrimental way. 

7 Reasons Why CPI Is Critical in Today's Economy

In my experience, CPI is almost always the fairest, safest, most comprehensive solution for protecting your credit union against the inherent risk of uninsured physical damage losses. I have seen the evidence for this time after time, and it's one of the biggest reasons I'm so passionate about what I do to help my clients.

Especially in today's economy, it literally pains me when I see any credit union moving away from their tracked program, because I know they are most likely not going to be happy with their choice down the road. 

Why? There are many more reasons than I could include in one article, but here are 7 of the biggest issues: 

1. When borrowers are strapped, one of the first things they drop is their insurance. When someone is having trouble paying rent or buying groceries, they often turn to what seems like the least painful solution — dropping their auto insurance to give themselves some wiggle room in their monthly budget. Ironically, lower-income drivers with the least "give" in their budgets are facing some of the highest rate increases, making dropping insurance even more tempting. 
2. Or, borrowers may try to stretch their budgets by raising their deductible too high. Almost all of our lender business partners are seeing a significant increase in borrowers whose policies are out of compliance with the deductible requirements in their loan agreement. This means that when there's an accident, borrowers are at risk of being pushed into default by repair costs they can't afford. 
3. Insurance rates are through the roof. The cost of car insurance rose 19% in just one year. Between natural disasters, the skyrocketing cost of cars and auto repairs, and other economic factors, both auto and homeowners' insurance premiums have been increasing at a far higher rate than overall consumer prices — and keep climbing.
4. Primary insurance carriers are modifying their policies to cut claim costs. We're hearing about policies with more exclusions, provisions, and restrictions than ever before — leading to higher deficiency balances in the case of an accident. Higher deficiency balances equals higher risk for your credit union.
5. Even worse, insurers are refusing to write some policies altogether. The consumer insurance industry is in turmoil. Some insurers aren't even able to raise rates high enough to make staying in some markets viable, and so they are pulling out of certain states completely. Some carriers are also declining to write coverage for specific vehicles, such as certain Kia and Hyundai models.
6. Cars remain very expensive. By late 2023, the average vehicle loan amount was $40,184 for a new car and $27,167 for used. The average monthly auto loan payment for a new car also hit a record of $739. To finance these high-priced vehicles, borrowers are taking out loans with longer and longer terms — an average of more than 5 ½ years for both new and used vehicles. All of this means more risk exposure for the lender, for a longer period of time.
7. Car repair costs are prohibitive. Those record-high auto values, combined with expensive technology components, make repairs very expensive. So expensive, in fact, that more and more cars are becoming total losses for even supposedly "minor" damage. Again, this translates to more risk in your portfolio, and the potential for excessive charge-offs when policy caps are reached and exceeded.
   
   

Navigating Today's Economic Landscape Requires Long-Term Strategy, not Shortcuts

With a staggering $1 trillion in national credit card debt, consumers are feeling the pinch. Rising prices for essentials like food and clothing only add to the strain. When your members begin to struggle with their expenses, car insurance often becomes the first casualty.

If you're not tracking insurance coverage on your auto and mortgage loans, things may seem to quiet down for a little while — but it's a proven fact that the percentage of uninsured borrowers inevitably rises when insurance isn't being monitored. By a LOT.

And not only do you end up with more uninsured borrowers, you have no way of knowing which of your members have insurance and which ones don't! It all ends up costing your credit union — and ultimately your members — more in the long run.

In light of these harsh realities, having a strong collateral protection program in place today is not just advisable — it's imperative. 

The Value of CPI for Credit Unions

CPI brings immense value to credit unions. It ensures that your collateral remains financially covered in case of higher-than-average losses and delinquencies — which is precisely the conditions we're experiencing right now.

And, although CPI is intended to safeguard the credit union's interest in the collateral and not primarily to protect the borrower, the right kind of CPI does offer your members some crucial protections they do not have when they drop insurance altogether.

With economic volatility being the new norm, having a robust collateral protection program is paramount for lenders. As insurance carriers continue to raise rates and become more selective about the coverage they offer, CPI provides an added layer of security for credit unions and their loan portfolios.

We Truly Care About Your Credit Union's Long-Term Success

I consider every one of the clients I work with to be not just a customer, but a partner, and I truly care about their success. I also believe in the credit union mission, and deeply respect everything our clients do to serve their members and help them make choices that will protect their financial interests. 

It's always a tricky balance trying to satisfy the many competing demands and priorities that come with successfully running any financial institution, especially a cooperative one. Credit unions must prioritize safeguarding their interests while also treating their members fairly, and a well-structured CPI program is an excellent way to do just that!