The ratio of consumers that are uninsured is 1 in 8 borrowers, and the likelihood that every lenders’ portfolio is partly made up of uninsured borrowers is high, Denis Brosnan, president, and chief executive of DIMONT said during a webinar.
However, lenders — both prime and subprime — have lost focus on developing strategies for insurance monitoring and tracking within their portfolios.
“[Lenders] need to have some visibility as to what the insured status is on their collateral,” Brosnan said. DIMONT data found that the uninsured rate among subprime portfolios is 35%-40%, while prime is 10%-15%.
There is a significantly higher rate on subprime, and the percentage would typically represent a $12,000 balance, but for prime lenders, it’s a different story.
The 10%-15% may not seem like a lot, but prime lenders are dealing with a much higher vehicle value, so losses are exacerbated when these consumers are in an accident. “With prime, that’s a $40,000 car most of the time,” said Steve Garcia, director of auto claims at DIMONT.
Brian Massey, director of collections and loss recovery at the captive Nissan Motor Acceptance Corp., concurred during the webinar, admitting that prime lenders have pulled back insurance monitoring strategies.
“[For captives] you’re looking at higher dollar amounts and loan-to-values,” Massey said. “[Captives] are also looking at smaller margins so that makes it even more important to be able to secure as much as you can from a collection standpoint because those losses can add up quick.”
The problem lies with a lack of lender strategies for insurance tracking as it is tedious and the traditional model is old-fashioned. To that end, DIMONT found three main challenges lenders face.
First, many lenders are moving away from force-placed insurance, possibly because of the steep compliance costs Wells Fargo Auto faced for the practice that make the risks no longer worth the reward.
The pull-back in force-placed insurance is consistent across the subprime market, Garcia said. However, more surprisingly, the prime space is also experiencing pullbacks due to the scale of prime lenders’ large portfolios, as well as the overall cost to monitor insurance.
“A lot of prime lenders have also moved away from force-placed insurance because of the cost and collection of it if necessary — it’s a very outdated model at this point,” Massey said. “Despite some of the risk, the upside is not there.”
The second problem is that lenders do not generally have access to outsourced tracking data. In the past, insurance monitoring was wholly based on paper mail, which either got ignored or doesn’t tell the lender what was conveyed to the consumer in the letter.
“Whether it’s a new policy notification or new policy change, [insurance monitoring] is critical and a key to what any lender — prime or subprime — can benefit from,” Garcia said, noting a higher need for insurance monitoring for subprime lenders working with high-risk borrowers.
The third challenge for lenders is that they do not currently have a cost-effective solution for ensuring collateral protection — this is where a third-party vendor comes in to offset operational costs and turn that paper mail into useful digital data.
Vendors like DIMONT provide 92% coverage rate through electronic coverage with insurance carriers — essentially taking the problem by enhancing borrower and collection strategies through its insurance monitoring data.
“What we’ve created is data-driven solutions that provide increased analytics and enable improved borrower outreach strategies,” Garcia said. “It’s a seamless way for lenders to have the ability to move back into the insurance market.”