During the due diligence process of evaluating risk transfer alternatives for your vehicle portfolio, all lenders must answer the question of whether to manage physical damage risk or transfer this risk to a VSI Insurance or a CPI Insurance policy. The goal of any collateral protection insurance program is to reduce net charge-offs or at a minimum, help manage net charge-offs to an acceptable level.
This article provides a brief explanation that compares a Collateral Protection Insurance – CPI Insurance program to a Blanket Vendor Single Interest Insurance Program -VSI Insurance.
What is Collateral Protection Insurance?
Traditionally, collateral protection insurance, or CPI Insurance, uses insurance tracking to determine if a borrower’s insurance has lapsed, or is insufficient based on the lender’s loan agreement.
Once a borrower’s insurance policy has expired, the lender sends a series of notifications to the borrower ending with force-placing insurance by issuing a Notice of Insurance.
This Notice of Insurance is part of the lender-placed insurance policy. The lender invoices the borrower for this premium but is ultimately responsible to the lender-placed insurance company for paying any uncollected premium.
Lender-placed insurance coverage includes all-risk physical damage to the covered vehicle during the effective dates of the Notice of Insurance.
Truth in Lending Act (TILA) regulation does not allow lenders to charge the borrower for Skip tracing and other “lender coverages.” If the lender is looking for these coverages, they must pay for this coverage themselves.
Lenders typically outsource the tracking and placement of CPI insurance to an insurance tracking company. The legacy business model of insurance tracking companies may not align with a lender’s customer service goals. Providing free, or below cost, insurance tracking puts pressure on the insurance tracker to generate insurance placements to pay the insurance tracking expense.
The lender’s and insurance tracker’s goals are not aligned, as the tracking company is not as concerned about any loss in the lender's reputation due to poor data, or even worse any compliance issues.
For the best possible borrower experience, shouldn’t the insurance tracker be incented to help the borrower, not force-place insurance on them to pay the bills?
Borrowers who are force-placed may already be in financial trouble, so historically a lender only collects 65% to 75% of the force-placed insurance premium billed to the borrower. Also, claim payments from CPI policies have historically paid losses on 35% of the premium dollars.
There is no net charge-off reduction if the lender pays 35% of the premium dollars, but only receives back 35% in claims payments. The lender does not transfer significant risk but may have additional operational expenses and dissatisfied borrowers.
Obtaining a substantial reduction in net charge-offs from a CPI insurance program may be inversely correlated to the credit quality of the lender’s portfolio.
Many CPI insurance providers will argue unrealistic CPI value propositions and other soft benefits. We believe CPI insurance should be used to manage collateral risk by encouraging the borrowers to maintain their vehicle insurance. An insured borrower who has an accident will not become a repossession.
Our CPI program uses our Borrower-Centric approach, which works with your borrowers to help them maintain their vehicle insurance.
Borrower-Centric CPI Insurance Benefits to the Lender
- Encourage the “procrastinating borrower” to maintain their vehicle coverage.
- Reduce the number of repossessions due to un-insured borrowers “walking away” from damaged collateral.
- Protect your collateral interest by force placing insurance on the borrowers who are “unable” or “unwilling” to obtain their vehicle insurance.
- Protect your “repossessed collateral” interest against physical damage that occurred before repossession.
Vendor Single Interest Insurance- VSI Insurance
VSI Insurance is a blanket insurance policy designed for lenders who finance automobiles, recreational vehicles, watercraft, farm equipment, and mobile homes. The purpose of the insurance is to transfer the collateral risk from the lender’s portfolio, allowing the lender to focus on managing credit risk.
VSI Insurance Process
The borrower pays VSI Insurance premium at loan origination. This premium is disclosed on the Retail Installment Contract and is excluded from the API calculation in most states. The policy covers uninsured physical damage losses and skips discovered after the borrower defaults on their loan.
The dealer benefits from VSI with competitive rates and more aggressive underwriting across a broad range of credit scores. The borrower also benefits from the lower rates. In addition, if the borrower’s collateral is damaged and repossessed, the outstanding loan balance will be reduced by the amount of the physical damage paid by the VSI insurance.
VSI Benefits to the Lender
- Physical Damage and Skip Coverage for delinquent loans
- Reduction in net charge offs 10% to 17%.
- Eliminate borrower insurance tracking.
- Eliminate the non-interest expense (NIE) associated with invoicing and collecting force-placed insurance premiums.
- Eliminate customer dissatisfaction from rescheduled, higher monthly payments.