With delinquencies expected to increase as the government stimulus has ended for consumers and financial institutions’ net interest margins continue to be squeezed, insurance products will become an increasingly important tool for financial institutions to offset expected delinquencies by mitigating loan portfolio risk while generating non-interest income.
Payment Protection Products (Credit Insurance and Debt Cancellation)
Virtually every lender expects deterioration in their loan portfolios in 2022. With the end of federal government stimulus programs and real wages declining, savings rates are already showing signs of reversing from the pandemic highs.
Wages increased by 4-5% in 2021; however, headline inflation increased by 7.5%, resulting in a decrease in consumer purchasing power (real wages). Inevitably, this will lead to a strain on consumer balance sheets and an increase in delinquencies.
In addition, with car prices (particularly for used vehicles) increasing at historic levels and longer loan terms, buyers will likely have negative equity in their autos for a longer period of time. Used car prices will inevitably come back down once supply chain issues are resolved, leaving lenders exposed to potential large write-offs when defaults do occur.
One important way to help mitigate such losses will be for lenders to encourage borrowers to invest in payment protection products that could help cover them in the event of unforeseen circumstances that might impede their ability to make payments.
Not only will coverages such as credit life, credit disability, and/or credit involuntary unemployment insurance, or a comprehensive debt cancellation program help protect your borrowers from even greater financial hardship (due to higher prices and longer terms), they should also help mitigate losses to your institution as well.
For the borrower, payment protection insurance is typically much more affordable than traditional life or disability insurance, not to mention the fact that involuntary unemployment coverage is not available in the general marketplace. As such, it should be a good option for tightening budgets as real wages decline.
Additionally, the sale of these insurance products will offer lenders an important source of non-interest income during a period of tightening monetary policy coupled with softening loan demand.
Accidental Death and Dismemberment (AD&D)
Another key tool to both mitigate personal liability risk and generate non-interest income, particularly from younger borrowers, will be AD&D insurance. Even though younger workers tend to pose less risk in terms of mortality, they are experiencing the same negative real wage growth and balance sheet stresses.
These policies are also much more affordable than traditional life insurance, as they pay on losses only as a result of an accident. This product represents a good way to provide the consumer with easy access to a streamlined life insurance product while increasing revenue to your financial institution at the same time.
A by-product from the pandemic was the significant increase in pet ownership throughout the country as people were at home much, much more than in the past. Not only is the consumer increasing their grocery bill with the addition of pet food, they are also incurring the new or increasing expense of veterinary bills.
For the consumer, this policy reduces the risk that unforeseen pet care expenses may stress already strained budgets and/or increase debt. This, in turn, should also mitigate further deterioration on existing loan delinquencies for lenders as the consumer will maintain higher disposable income.
To help mitigate increasing pet-care costs and the negative real wage pressures for your borrowers, offering pet insurance as a voluntary protection product can provide a convenient way for them to purchase a desired product while providing another viable tool to drive additional non-interest income.
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