Collateral Protection Insurance: How to tell if it’s worth it

As I have said in past articles, when it comes to dealing with borrowers who can’t or won’t comply with the terms of their auto loan agreement, collateral protection insurance (CPI) might just be your best strategy for protection, and that there are several top vendors in the country doing it well.

But in this article let me switch gears and help you evaluate if indeed a CPI program is right for your credit union. I’ll start with a discussion of the intangibles, the inherent hassles for your staff and borrowers. And I’ll finish with some tips on evaluating the financial benefit of a CPI program. Is it worth it to your credit union? Do the claims dollars you receive outweigh the hassle factors? Let’s start with those.

The Intangible: The ongoing hassle of having a CPI program

Managing your CPI program, and your vendor, has a real cost. For the former, it can be hard to measure besides the salaries of any dedicated FTEs, but there are most certainly costs.  Everyone who works daily with a CPI program knows the issues associated with a program, issues that have to be dealt with continuously. Some include:

• Dealing with the unavoidable member ‘noise’ created by the insurance requirement letters
• Pulling loan history and locating other information to file claims
• Cajoling your IT department to tweak the loan file and make the returning file play nice with your core system
• Adding premium to loan balances, and then refunding the lion’s share of it
• Handling one-off issues that arise week after week
• Actually collecting the premium, which is only going to get harder (and probably more gut wrenching)
• And all the while, wondering if your program’s performance is good, bad or ugly compared to your peer’s numbers.

Vendor oversight takes time and if you go to bid every three years, as you should, it is a long, resource-eating process.  Each of the large vendors is adept at putting their best foot forward while credibly implying their competitors are way-behind the times. Weeding through the hype, even by issuing an RFP or side-by-side matrix, in an attempt to establish an apples-to-apples comparison is almost impossible (believe me, I’ve worked on more of these than I can count). Maybe you’re getting a well-run program, maybe a different one would work better.

The Tangible. The Financial Benefit –and what it would look like without CPI

Time for some math! First, get a current 12-month statement from your vendor, one that indicates claims paid, by type of coverage. It’s best to get the last full calendar year (2019) report because you want to compare with select fields in your 5300 Call Report. The time periods will be comparable.

Once you have the claims report, subtract out all premium deficiency claim dollars from the 12-month total. Take out both premium deficiency ‘loss’ and ‘no loss’ (note: a ‘loss’ to your vendor represents a claim paid to you) claims. If you didn’t have a CPI program, you wouldn’t have a claim for ‘deficient’ premium, so subtract out those numbers and you’re left with a ‘true figure’ of the claims dollars you’ve received.

For perspective, compare that number to your non-interest income, as a percentage, for the year. When I last looked at it, the average for dozens of large credit unions I studied was 2.5%, but many individual credit unions averaged less than 1%, which might be enough to start to question the overall value of a CPI program to your credit union.

Also look at your net auto charge-offs for the previous year (make sure you add back auto recoveries to get the net) and compare that with the ‘true figure’ of claims paid to you. You should also calculate how much higher your net auto charge-offs would have been without your CPI program.  For some credit unions, this figure can exceed 30%, but then for others, the percentage is well below 10%.  Again, your number might be low enough to question the value of your program –looking at the losses from physical damage (without a CPI program in place) as just a cost of being in the auto lending business.

And this only scratches the surface. Obviously, we are entering a period of a new normal and only you can determine if the benefits of your CPI program outweigh the cost and hassle factors, and really make economic sense for your portfolio. Hopefully, this helps a bit. And, certainly, you’d like to talk through your numbers, feel free to drop me a line.

In ensuing articles I’m going to discuss the unique economics of CPI: who pays, who benefits; the various ways vendors earn premium; the marginal cost of tracking insurance for one additional loan, especially with new technologies, and what it should mean for your loss ratio.

Stay tuned and thanks for reading.