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What Is Collateral Protection Insurance (CPI) — and Do You Need It?

Part 1 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. Here in Part 1, we share a simple definition of what collateral protection insurance (CPI) is, what it does, and how it can benefit lenders.

What is a Collateral Protection Insurance (CPI)— and Do You Need It?

On the road of life, we all face obstacles — some we can manage, and others outside of our control. To minimize catastrophe caused by unavoidable hazards, it’s important to have security measures in place. In your personal life, daily security measures may involve wearing a seatbelt while driving or turning on your house alarm each night. Long-term security measures may involve maintaining an emergency fund or purchasing life insurance. Lenders also need to take both short-term and long-term steps to minimize unavoidable hazards in their institutions.

Icon_UmrellaCollateral protection insurance provides a solution by helping mitigate the risk lenders incur when offering vehicle loans to borrowers. Because CPI can be helpful during all economic circumstances, it serves as both a short-term and long-term security measure.

Understanding how CPI works will help you decide if it is the best way to mitigate risk in your financial institution. And if CPI is the best choice, this understanding will help you choose a provider that is best able to provide the protection and service you need to make your CPI program a success.

A Complex Definition Made Simple

Collateral Protection Insurance (CPI) is coverage placed on a borrower’s vehicle, on behalf of a lender, when there is a lapse in insurance.

Icon_Document-Signature-2When borrowers take out an auto loan, their loan agreement usually requires that they maintain physical damage insurance to cover the loan collateral, naming your financial institution as an additional interest on the policy. Unfortunately, not all borrowers will fulfill this agreement, either never purchasing insurance or letting their coverage lapse. In fact, about 1 in 8 drivers in the U.S. is uninsured — and, in some states, the percentage of uninsured motorists is as high as 29%.

Lenders can choose to retain the risk of loss if damage occurs to uninsured vehicles. However, just like wearing a seatbelt is a smart choice for preventing harm in an auto accident, most institutions transfer risk through an insurance program, such as CPI.

How Does CPI Work?

CPI shares similar characteristics with all types of insurance: Policies are written, and CPI insurers pay claims when losses occur. However, there are also significant differences between CPI and other types of insurance. Lenders should understand these differences when choosing a CPI program and provider.

Borrowers who do not comply with loan requirements to purchase insurance on their own will have CPI policies issued under CPI program objectives. Once a program is in place, borrowers are not individually underwritten — issuance of a certificate of coverage is guaranteed by the provider.

Because CPI placement is determined by the status of underlying insurance, CPI requires a high level of service, monitoring, and management to avoid accidental lender-placed insurance. A CPI provider’s ability to quickly and accurately identify and manage a lapse in coverage directly correlates to saving a lender time and money.

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Data on borrowers’ private insurance must be constantly collected and kept current to ensure that CPI placements are correctly made and that refunds are accurately issued when previously non-compliant borrowers do purchase the required insurance. This is one of the many reasons the CPI program provider a lender selects is of critical importance. An ideal CPI provider will offer borrowers hassle-free, turnkey ways to update their insurance on behalf of the lender.

Are Lenders Required to Use Portfolio Protection?

Icon_User-GroupAlthough regulators often recommend having a portfolio protection solution in place, such a program is not required. Lenders can instead choose to retain the risk of loss if damage occurs to uninsured vehicles they repossess by self-insuring. Alternately, they can mitigate risk with portfolio protection options such as a blanket policy or CPI.


How does CPI compare to blanket and self-insurance? In Part 2 of our blog series, CPI, Blanket, and Self-Insurance: Which Is Better for Your Financial Institution? we’ll look at some of the pros and cons of each and provide insights into the six areas you need to consider when determining which type of program is right for you.

If you have any questions about this article or about portfolio protection 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 Guaranteed Asset Protection (GAP) Mitigates the Risk Caused by Record High Auto Prices

Now, more than ever, it is critical to protect your auto loan portfolio with GAP Vehicle values have been at historic highs for the past year If you considered purchasing a vehicle this summer, you likely experienced some degree of sticker shock. New and used vehicle prices skyrocketed earlier in 2021 and are only now showing signs of a slight slowdown. How did we get to the point where Edmunds.com reported the average trade-in value of used vehicles was up 75.6% Year-Over-Year (YOY) in June? Simply stated, it all began last year. The manufacturing shutdowns of early 2020 left dealers with low inventory levels as shelter-in-place orders lifted and consumers, armed with stimulus funds and a desire to spend, went auto shopping in droves. The resulting low dealer inventories meant that would-be new car buyers were often forced to consider used vehicle options instead. Both new and used vehicles prices started rising in response to this unusual surge in demand. Despite seeing some stabilization of vehicle pricing in late 2020, things took a turn for the worse this year due to the global shortage of microchips. According to TrueCar, a Consumer Reports partner, there still remains an inadequate allocation of microchips for automobile manufacturers, exacerbating the inventory shortages that began in 2020. With inventory down as much as 50% in some areas, willing and able consumers are paying significantly more, with 20% of all new car purchases in May 2021 transacting at amounts above MSRP. This phenomenon has not been limited to new car purchases only — CNBC shared earlier this month that the average price of a used vehicle was up 21% YOY with a 10% increase from Q1 2021 to Q2 2021. What does the future hold for car values? July witnessed a slight reduction in the rate at which vehicle prices were increasing YOY. However, Carvana’s CEO, Ernie Garcia, warns that the cost of used cars will not normalize until manufacturers can produce inventory at pre-2020 levels. Supply chain challenges are likely to cause “some lasting” impact on used car prices, said Garcia on an August 6th CNBC’s Squawk Box. Black Book, in their 2021 Vehicle Depreciation Report, paints a slightly less optimistic picture, projecting “residual forecasts to return to pre-COVID 19 valuation levels in 3 years.” How will this valuation normalization impact lending portfolios? For a variety of reasons, many consumers found themselves paying in excess of MSRP or NADA for a vehicle over the past 18 months. This reality will not change overnight — it will take the automobile manufacturers replenishing and maintaining inventory levels on a consistent basis for prices to normalize. Whether that be in 2022, or in 3 years as predicted by Black Book, the reset of vehicle valuations has the potential to negatively impact your auto loan portfolio. Black Book’s annual vehicle depreciation rates averaged approximately 13% for each of the 9 years prior to 2020, when it dropped to just 2%. As vehicle valuations fall back in line with more historic depreciation models, loans already on the books as well as loans written through the remainder of 2021 will reflect inflated sales prices. In the event of a future theft or total loss at a time when vehicle values are back to pre-COVID-19 levels, primary carrier Actual Cash Value (ACV) settlements will result in unprecedented deficiency balances. And that is where GAP can help. Essential protection for you and your borrowers GAP has always been an important risk management tool. However, in today’s economy when vehicles are still selling above MSRP or NADA, it is especially important to lenders and borrowers alike for collateral to be protected against the changes in valuation expected over the next several years. Private Passenger Auto carriers settle total loss claims based on the ACV of the vehicle immediately prior to the loss, regardless of the original sales price. Inflated sales prices mean inflated loan balances on the date of loss, resulting in increased deficiency balances — the exact thing GAP is designed to protect. Not only will your potential charge-offs be reduced with GAP protecting your collateral, but your borrowers will also be better positioned to finance their replacement vehicle without the burden of having to satisfy a large deficiency balance on their original loan. How State National's GAP is different The State National GAP product provides unparalleled flexibility in the marketplace, primarily given our unique position as the direct sales force, underwriter, and program administrator. With options to protect amounts up to 150% of MSRP or NADA, you won’t need to worry about future deficiency balances resulting from today’s extraordinary market conditions. Additionally, you can rest easy knowing your pricing is not inflated to cover agent costs or, worse yet, that you will be part of an across-the-board rate adjustment because another lender’s program is not performing as expected. If you’re looking for the most efficient GAP claim submission process (it’s true — we really do not require any supporting documentation to initiate a GAP deficiency balance claim) and fastest claim settlement time (2 to 3 days, on average), isn’t it time you consider State National for your GAP Program? Contact us today to start protecting your consumer loan portfolio from the effects of inflated auto prices — driving a more positive experience for you and your borrowers.     Contact us today to receive more information about GAP from State National. Francine Gagliano, State National Director of Client Services 817-265-2000 x1247 or fgagliano@statenational.com

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State National Employees Crowdsource to Give Their Company Blog a Name When we launched our State National blog in 2020 as part of our company’s newly redesigned website, we had a few goals in mind: To provide valuable thought leadership and educational content that could be of help to our clients, potential clients, and anyone else in the industry whether they ever became a client or not To add even more transparency (one of our main core values) around the way we do business To help others in the industry get to know more about the thoughts and insights of some of our experienced subject matter experts and assist in building relationships To share more about the company culture we’re very proud of with those in the industry and with potential future employees And of course (speaking of transparency), because we are in business — to share benefits and features of our products and services and show credit unions, banks, and finance companies how we can serve them and help them be more profitable and successful The blog has been a great success so far, and we’ve received really positive feedback about the value people are receiving from our content — thank you!

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