Tackling Uninsured Collateral Risk
By Doug Falvey, Senior Vice President | Allied Solutions
The pandemic affected nearly every industry, with the auto industry in particular facing increased growth. A NAFCU member survey notes that the credit union industry saw sustained auto loan growth during the pandemic and auto loans account for 33% of a credit union’s portfolio. But this growth isn’t without its own set of challenges. As you continue to serve your members and community through and beyond the pandemic, it’s also vital to protect this sizable aspect of your loan portfolio while maintaining compliance and member satisfaction. Some credit unions are rethinking their risk management strategy in light of the pandemic’s impacts.
Risk Mitigation Complexities
Collateral Protection Insurance (CPI) or Lender-Placed Insurance (LPI) is an integral aspect to mitigating risk on vehicle portfolios, but many credit unions struggle with communicating insurance requirements to members, tracking insurance, communicating with carriers, and verifying insurance status and coverage. These challenges are made more complex by CPI generally being a program that creates member “noise”, or frustration.
A holistic CPI program should be member-centric and supportive of other business goals. This is done by tracking insurance on collateralized auto loans and placing insurance when necessary.
Best practices to help manage risk with Collateral Protection Insurance (CPI)
1. Leverage Technology Integrations
Technology is a vital aspect of a CPI program and allows for insurance information to flow between credit union, member, and carriers. Without optimized technology, tracking insurance statuses and communicating with carriers can result in burdensome work for staff and a less-than-ideal experience for borrowers. A technology that integrates with top insurance carriers can help improve negotiations with insurance carriers and eliminate premium and refund calculation errors. Robotics technology can real-time search for insurance that exists but may not have been verified by the borrower. Technology integrations can also streamline multiple processes, creating efficiency in the overall insurance tracking, verification, and if necessary, placement.
2. Keep Member Communication and Self-Service at the Forefront
Sometimes technology isn’t able to locate and verify insurance on a collateralized loan and it is necessary to involve the member. A member messaging strategy can leverage multiple channels of communication, including text, email, video, and printed notices to remind borrowers of their obligation to maintain insurance on their vehicle. Employing omnichannel communication techniques staggers communications on a compliant timeline while allowing members to absorb the messaging. This type of communication strategy can reduce borrower aggravation for those members that are aware of their insurance requirements and simply need to self-verify their proof of insurance. Our expertise shows that less than 10% of borrowers fail to provide proof of coverage on their collateralized auto loan, but 5-7% will do so once being reminded of the requirement.
3. Seek to Satisfy Members and Reduce False Placement
The foundation of a holistic CPI program is tracking insurance. However, when insurance tracking and borrower communication efforts have been made and proof of insurance cannot be verified, placing coverage on the vehicle may be necessary to protect collateral. False placement occurs when insurance did exist and CPI was not needed but voluntary insurance could not be located prior to placement. Because of our proactive verification and tracking methods, Allied Solutions is proud to maintain the lowest false placement rate in the industry. Reduced false placement results in more satisfied members and less refunds to process.
Tracking the status of insurance on collateralized loans provides a roadmap for risk, indicating which loans are not insured or at risk of not being insured. A holistic CPI program should incorporate technology with omnichannel communication strategies to reduce false placements, while protecting your relationship with your members. For a strong risk mitigation approach in 2022, make sure that you have a sound risk management program that prioritizes your members and protects your auto loan portfolio.