Maintaining auto insurance coverage is what most would consider “old news.” For borrowers and lenders alike, it is a necessary investment that protects all invested parties from experiencing loss. Specifically for lenders, getting borrowers to comply with the terms of their auto loan contract is particularly critical as a breach of contract could have an adverse effect on your bottom line.
However, what many lenders are learning is in light of COVID-19 and the economic uncertainty that has accompanied the shutdown of many businesses and industries across the country, many consumers are under significant financial duress. Financial hardship measures have been put in place to support consumers, providing payment extensions and loan forbearance options, but with an economic future that is wrought with uncertainty, there is a high likelihood that insurance coverage—and the subsequent tracking and placement of collateral protection insurance (CPI)—will be impacted.
Walking the Tightrope
From a financial institution perspective, balancing risk with your member service is much like walking a tightrope. Given the current state of affairs in our economy, financial institutions are certainly being sensitive to the financial stress some of their borrowers are experiencing; however, they are not immune to auto loan portfolio risk. Some of the risk management-related concerns my financial institution clients have expressed include:
The increase in member noise surrounding increasing monthly payments due to premium placement
Cash flow issues related to fronting large policy premiums in traditional collateral protection insurance programs
Delinquency—both due to financial stress from COVID-19 and large premiums placed on loans
The possibility of skips/repossessions as a direct result of delinquency
CPI Program Flexibility
For borrowers who may be experiencing financial hardships, receiving a letter notification informing them their auto insurance has lapsed and they are in violation of their loan terms could be an enormous stressor. Borrowers focused on keeping their bills paid and staying in their vehicles can potentially be financially devastated by premium placement included in traditional CPI programs. While making CPI exceptions for borrowers who have been force-placed may seem like the “right” thing to do to assist borrowers, placing unnecessary risk on your portfolio for the sake of keeping borrowers happy is not prudent. As the title of this blog post states—balancing service and risk is a challenge!
So, how can your financial institution help borrowers stay in their vehicles while still ensuring your loan portfolio is protected? One solution is to find a partner that offers flexible collateral protection insurance programs. For example, SWBC’s Hybrid CPI solution offers lender-placed policies that often cost borrowers as little as $50-$90 per month. This alternative form of collateral protection insurance can not only decrease the “noise” from borrower complaints due to false placement, but it can also improve your institution’s cash flow by eliminating the need to cover an upfront CPI insurance premium. Hybrid’s monthly policy premium improves lender cash flow and also drastically reduces the cost to the borrower—a win-win for both the lender and borrower.
No One-Size-Fits-All Solution
Like most things, there is no one-size-fits-all solution for insurance tracking and verification. Every loan portfolio and consumer base is unique. So, depending on your institution’s coverage needs, a traditional CPI program may be the right fit. The key is finding a partner that has the flexibility and technology resources to support you with a program that can address all of your risk management needs.
To learn more about how SWBC can help you manage your institution’s CPI program, visit our website.