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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 more than 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 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.

 

 

 

Collateral 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.

When 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.

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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.

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?

Although 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.

 

Read Part 2, CPI, Blanket, Self-Insurance

Read Part 3, What to Look for in a CPI Provider


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 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.

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 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 Much Money Can We Save You? 4 Questions to Find Out

Protecting your auto loan portfolio doesn’t need to cost your credit union, bank, or finance company as much money, time, and resources as it does today. With seamless implementation and a multitude of unique advantages in our service model, State National saves lenders money. Just how much? Let’s find out! 1. How many auto loans do you have in your portfolio and how much time per week does your staff spend on managing collateral protection in your current portfolio? Our program is built to free up your staff’s capacity and provide you with FTE savings. Our exclusive lender platform, InsurTrak, has every tool you need, including: Real-time data on borrower insurance status, notifications sent, account history, insurance documentation, and all borrower interactions Instant, on-demand access to all recorded borrower phone calls. Fast, automated payment change and refund information On-demand management reports and customized, transparent reporting of all aspects of your program Created in-house and customized for CPI programs specifically, InsurTrak is the industry powerhouse in tracking, claims filing, reporting, and program management, all in one user-friendly, easy-to-use platform. “Efficient? I’d estimate State National’s system saved us 6 figures and 1 FTE!” ~ Steve McIntire, VP of Administration and General Counsel, SELCO Community Credit Union 2. What is your 12-month claim benefit? State National returns, on average, 20% more in claim dollars than other providers. Because we are the carrier, underwriter, and claims payer, there is no middleman and almost no paperwork required. Many claims are processed in 10 seconds with AI and those that need further review are paid within 5 days of their submission date. That’s 5 days start to finish. Additionally, filing a claims payment has never been easier for your team. Our claims form comes pre-populated with data from InsurTrak. You don’t even have to decide which claim type you want to file — we automatically process each claim for ALL available coverages, regularly returning more dollars to you. Did I mention we have broader coverages that provide more value to the financial institution? Not only that, but we offer a borrower-centric coverage that allows your borrower to file a claim even if they are uninsured! “State National has saved us a truly significant amount of money.” ~ John Grimes, AVP of Collections, MAX Credit Union 3. If you have a CPI provider, what is your current CPI penetration? We reduce CPI penetration by 20-30% because of our proprietary AI tracking software, proactive verification methods, and our email and text programs. Our Web-Based Robotic Automated Processing (WRAP) software automatically extracts insurance information from insurer websites and updates it in InsurTrak — without any human effort or intervention. WRAP uses AI and machine learning to proactively search for new policy information from seven different carriers, including the country’s top five auto insurers, before ever notifying a borrower. Only if we can’t verify insurance through WRAP or our other proactive and behind-the-scenes verification methods do we reach out to the borrower via multiple channels, including email and text. Borrowers can easily respond through the channel they prefer — email, phone, or our borrower-facing MyLoanInsurance.com portal. They can even send an image of their insurance information by text! All this combines to create a more seamless, frictionless experience that results in lower penetration rates and greater client and borrower satisfaction. “Even though State National provides the insurance, I know their goal in the end is to NOT have forced placements. It's an active partnership that hits from all angles.” ~ Lora Stebleton, Vice President of Payments & Customer Service, Gate City Bank 4. What core processor do you use? InsurTrak is engineered to work seamlessly with all major core processors. Because innovation is our mindset, we have multiple automation options available to accommodate your systems and processes. When designing InsurTrak, we kept software compatibility a top priority. This means seamless real-time premium adds, refunds (including partial refunds), and payment syncing. With minimal steps to set up, you can link Symitar Episys, Temenos, and AKUVO directly to InsurTrak. For those who use Symitar Episys, State National has set up two-click direct connectivity, allowing all InsurTrak data to be accessed through your Episys system. Temenos and AKUVO users can easily connect to InsurTrak within their frameworks using the State National connector. “I just don’t think anybody else out there can compete with what State National has as far as the product, the technology and innovation, and how many things are automated.” ~ Corey Rupp, Chief Retail Officer, Affinity Plus Credit Union Switch Without a Glitch Once you decide to partner with State National, our dedicated Program Implementation Team is there to guide you all along the way and answer any questions you may have during any step as you onboard. “It was the best implementation I have done with any company. It was flawless.” ~ Joy Dominguez-Mota, Department Manager, Nationwide Acceptance Want to determine the actual savings your financial institution can achieve with these advantages? Let us know your answers to these questions and see how you can take advantage of these and other exclusive benefits. Sign up for an in-depth, customized consultation and program review today to see how much time and money we can save you!