When buyers sign the paperwork for a vehicle purchase, they probably breeze right past the part where they promise to maintain proper insurance. The vast majority have every intention of staying insured, and buyers simply scribble a signature and move on. Other than questioning an up-front insurance charge they weren’t expecting, they may not give the subject much thought.
However, insurance is a subject that lenders need to think about. One in eight U.S. drivers are uninsured, and some are in lenders’ portfolios. Vehicles damaged or totaled without coverage affect the bottom line of those lienholders. With auto loan debt hitting a record $1.4 trillion in 2018 and delinquency rates rising, lenders need to decide how to insure the vehicles in their portfolios. Financial considerations are crucial to making this decision, and so is the effect the choice will have on the customer experience.
Self-insurance: Lender bears full responsibility for losses
Pros: Eliminates administrative work of tracking loans. Full control of administrative processes.
Cons: The highest risk and largest number of charge-offs. Lenders who don’t track insurance or who do so inadequately potentially incur regulatory, audit, and reputational risk. Customer experience is indirectly affected, as the lender has to factor in these costs as well as increased financial reserves when setting interest rates and fees, potentially making them less competitive in the marketplace.
Blanket/VSI Insurance: Lender premium based on outstandings
Pros: No need to track insurance, as a lender is insured for covered losses. Prevents the need to contact borrowers to verify whether they are insured.
Cons: Premiums tend to rise year over year as the number of uninsured borrowers and losses increase as the portfolio grows. Customer experience is affected, either directly by unexpected charges at loan closing, or — in jurisdictions that prohibit passing this cost to the borrower — indirectly in the form of higher interest rates and fees.
Portfolio protection insurance: Transfer risk to third party
Pros: Only affects the customer experience of borrowers who fail to provide proof of insurance; compliant borrowers pay nothing. Providers who offer customized plans can tailor programs to specific lenders’ needs. Changes borrower behavior, increasing compliance with maintaining proper insurance. Reduces charge-offs and improves overall profitability.
Cons: Poorly run programs or those lacking transparent systems and real-time, automated tracking can result in false placements and customer dissatisfaction. Providers that outsource reinsurance instead of underwriting certificates themselves can have delayed claims payment. Providers with poor service or overseas call centers can cause customer frustration. When deciding how to manage and protect your auto loan portfolio, know the pros and cons of each option, then choose the one that best fits your institution’s risk tolerance, customer experience expectations, and financial goals.
As VP of finance company markets for State National Companies, Mark Baltuska leverages more than 15 years of industry experience to help finance company professionals find solutions for their portfolio risk challenges. State National, a division of Markel Corp., is the Customer Experience partner of Auto Finance Excellence (AutoFinanceExcellence.org), a sister service of Auto Finance News.