Collateral Protection Insurance (CPI): What is CPI and what does it do?
Minimizing Road Hazards With CPI
On the road of life, we all face obstacles — some we can avoid with careful planning, others outside of our control.
In your personal life, minimizing catastrophe may involve wearing a seatbelt while driving, or purchasing life insurance. For financial institutions, there are also ways to avoid known hazards and minimize damage from the unavoidable ones.
One pothole they can easily bypass is risk of loss from damage to uninsured collateral. The most effective method for minimizing this risk is CPI: Collateral Protection Insurance.
A Complex Definition Made Simple
When taking out an auto loan, borrowers agree to maintain physical damage insurance on the vehicle, naming the financial institution as an additional interest on the policy. Unfortunately, not all borrowers will fulfill this agreement, either never purchasing insurance or letting coverage lapse.
That’s where CPI comes in:
CPI is insurance coverage placed on a borrower’s vehicle, on behalf of a lender, when there is a lapse in insurance.
How Does CPI Work?
- The CPI provider receives information on all new loans and updates on existing loans in a lender’s portfolio and tracks the insurance status of each.
- The provider confirms which borrowers have not provided adequate proof of insurance and sends appropriate notices alerting them to do so.
- If a borrower fails to submit proof of insurance in response to these notices, the lender may then place CPI on the loan to protect its interest from damage or loss.
- The financial institution passes the cost to the borrower by adding the premium to the loan balance. The charge is removed as soon as private coverage is reinstated.
The Importance of Choosing the Right Protection
An effective CPI program requires a high level of service and monitoring to ensure that every loan in a lender’s portfolio is accurately tracked and updated, and that refunds are swiftly issued when a borrower does comply by purchasing the required insurance.
This kind of real-time tracking and management requires sophisticated technology and expertise, which is why lenders benefit by outsourcing to a provider specializing in it. An ideal CPI provider will also offer borrowers hassle-free, turnkey ways to update their insurance.
More CPI Facts
- Only uninsured borrowers who fail to purchase or maintain their own insurance pay premiums, so CPI is more equitable to the lender and its compliant borrowers.
- A well-run CPI program offers financial institutions the same protection as if the borrower maintained private insurance.
- Since CPI transfers the risk of loss to an insurer, loan portfolio expenses are predictable and loan business can be more competitive.
- It costs financial institutions little or nothing to obtain this protection.
The fundamental purpose of any insurance program is risk transference. CPI enables lenders to manage and mitigate risk by transferring the risk of uninsured collateral to an insurance provider. Understanding how CPI works will help you choose a provider that is best able to provide the protection and service you need to make your CPI program a success.
