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    Lending | 3 min read

    Reduce Costs and Mitigate Auto Portfolio Losses with Hybrid CPI

    The past few years have been some of the most disruptive for the auto industry since World War II, with the pandemic and semiconductor shortage interrupting manufacturing and sending both used and new car prices through the roof. Luckily, 2023 is expected to bring relative stability, though it will not be the same market we experienced prior to 2020.

    Supply chain issues are expected to improve slightly, resulting in an increase in vehicle supply and less upward pressure on the price of older used cars. Demand will also be curtailed by higher interest rates, taking further pressure off supply chains and car prices.

    Prices for both new and used vehicles have decreased since their highs in the spring of last year, and these reductions are just starting to reach the retail level. Lower vehicle prices in 2023 could be a welcome relief for inflation-strapped consumers—many of whom have been waiting for prices to come down for a couple of years.

    With interest rates appearing to have peaked and supply chain issues getting back to normal, new car prices may begin to recede later this year, generating renewed consumer interest during this year’s new car buying season.

    Collateral Protection Insurance (CPI), or lender-placed insurance, is designed to protect the lender’s interest in a car or truck in the event the borrower doesn’t obtain comprehensive and collision coverage. Unfortunately, the additional cost of CPI premiums can be a contributing factor to the borrower not keeping up with their payments and eventually resulting in repossession. Fortunately, there’s a cost-effective alternative.

    In this blog post, we’ll highlight the value of offering hybrid CPI coverage to help your financial institution reduce costs and mitigate losses in your auto portfolio.

    2023 Economic Landscape and Product Outlook for CPI

    Savings rates fell throughout 2022, due in large part to negative real wages and consumers struggling to keep up with rising prices. These lower savings rates are translating into deposit levels dropping and overdraft fees and delinquencies beginning to inch up. The outlook is for this trend to continue well into 2024.


    Historically low levels of delinquency over the past years were artificially supported by unprecedented government stimulus. With this ending and inflation eroding savings and wage increases, past dues are beginning their return to normal.

    Credit card and auto loan delinquencies are up for the past six months. While credit card late payments are still well below pre-pandemic levels, auto loan past dues are essentially back to those levels seen in early 2020. Similarly, mortgage delinquencies remain very low and have only recently shown some signs of beginning deterioration.

    Virtually every lender expects deterioration in their loan portfolios with borrower savings rates declining steadily for the past 12 months. We have already begun to see insurance coverage levels deteriorate as well. As such, lenders should be looking to shore up their risk mitigation tools.

    Coupled with challenged valuations (particularly for used cars), CPI will be an important tool for protecting assets.

    Tighter Interest Margins

    Lender profit margins will be challenged due to the aforementioned deterioration in loan performance and tighter net interest margins. Products like traditional and hybrid CPI are expected to be more attractive than self-insurance alternatives.

    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 many Americans will continue to work from home or in a hybrid setting.

    With inflationary forces making vehicle repair and replacement more and more expensive, there could be pressure on CPI providers to increase rates in 2023.

    Why Hybrid CPI Is an Exceptional Offer in Today’s Economic Environment

    The traditional CPI program issues an annual policy in which the premium amount is determined as a percentage of the outstanding balance, leading to high costs for borrowers and increasing the potential for default. As lenders originate higher balance loans, the annual CPI premium will climb higher, increasing the financial burden for the borrower.

    On the other hand, the hybrid CPI program charges a flat rate monthly premium regardless of the outstanding balance, which enables more borrowers to maintain their payments, stay in their vehicles, and avoid default.

    Low monthly premiums give borrowers more financial freedom in a tight economy. The lower-cost solution helps reduce the likelihood of a borrower not being able to keep up with their payments.

    The benefits of a hybrid CPI program for financial institutions include reduced borrower noise, increased communication, less administrative work, and reduced refund activity.

    The physical damage coverage for the lender and the borrower is the same under both CPI programs and many of the same optional lender coverages available under the traditional program are available under the hybrid program.

    SWBC was the first to offer the now-popular hybrid CPI Program over 12 years ago. We built hybrid CPI from the ground up to meet your institution’s needs of improving cash flow and decreasing administrative responsibilities while providing borrowers with an affordable cost structure.

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    Michael Dippo

    As Senior Vice President of Automotive Products, Michael works closely with our Collateral Protection Insurance (CPI) carriers to manage existing CPI programs and develop new coverages for our clients. He is responsible for underwriting, corrective action, skip tracing, and asset recovery as they pertain to our CPI and blanket VSI products.

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