In a vast—and largely digital—lending landscape, big banks and FinTechs often hog most of the financial glory. They’re more visible and have slick advertising that suggests they’re the best and safest...
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With delinquencies expected to increase as government stimulus funds dry up, financial intuitions’ net interest margins will likely continue to be squeezed. As new car sales improve, 2022 should be a solid year for collateral protection insurance (CPI).
Delinquencies
Virtually every lender expects deterioration in their loan portfolios with the end of federal government stimulus programs and borrower savings rates already showing signs of declining. Insurance coverage levels will likely deteriorate as well. As such, lenders should be looking to shore up their risk mitigation tools. Coupled with higher valuations (particularly for used cars), CPI will be an important tool for protecting assets.
Tighter Interest Margins
Lenders will likely grapple with tighter interest margins and increasing delinquencies in 2022, leading to challenges to their bottom lines. Products like traditional and hybrid CPI are expected to be more attractive than self-insurance alternatives. Charge-offs in self-insurance approaches will probably go up in 2022, prompting lenders to consider increasing their loan loss reserves.
Auto Sales Outlook
Supply chains for auto manufacturers will continue to improve throughout 2022. It will likely take most of 2022 and early 2023 to fully resolve supply chain issues. As they get resolved, the pent-up demand for new cars should result in solid 2022 and very strong 2023 new car sales. The result will be an improving market for CPI over the next two years.
Loss Ratios
With mobility increasing across the entire country, currently low levels of insurance loss on vehicles will go up. However, they are not likely to reach pre-pandemic levels as more Americans will continue to work from home. With inflationary forces making vehicle repair and replacement more and more expensive, there could be pressures on CPI providers to increase rates in 2022.
Conclusion
Your auto loan portfolio can be your organization’s biggest liability. With a loan portfolio of any size, verifying and tracking insurance can be burdensome. That’s where SWBC’s CPI program can help reduce your financial institution’s portfolio risk. As part of our Total Solution suite of services focusing on risk management, payments, and income generation, our CPI programs address a variety of lending risk strategies for financial institutions of all sizes.
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