How to know if you have a successful insurance loan risk management strategy.
Over the years, I have had many lenders ask me how they compare to other financial institutions when it comes to lender placed insurance. While there is certainly a benefit to peer comparisons, a solid insurance risk management strategy should be designed around your borrowers, your lending policy, and your loss mitigation guidelines. Lenders often wonder if their force-placed insurance penetration is normal or too high. What about the loss ratio? Are the right coverages in place? Is the premium rate too high? If you take the time to evaluate your overall strategy and implement the right solutions, you can successfully manage your risk without worrying about comparisons and percentages.
Maybe you are frustrated with your lender placed program and are considering a provider change. Perhaps you are wondering if blanket or self-insuring is a better option. Either way, it’s important to consider the following issues:
First, are you truly willing to outsource?
Understandably, community lenders care about their borrowers having a positive experience throughout the life of the loan. Sometimes this results in the lender inserting themselves into the force-placed process in a way that can hinder the success of the program. Because providers rely on generating some level of premium in order to cover claims and overhead, it’s typically a best practice to let the provider do their job as designed. With effective borrower communication and sophisticated insurance-to-loan matching, your provider will help you minimize unnecessary force-placed policies. However, if your lending philosophy is to actively engage in placing calls to borrowers and insurance agents, then an outsourced program may not be the right fit. There are several different paths to take when it comes to managing your risk.But, for lenders who choose to outsource, the happiest clients with the least stress are the ones who let the provider do the work for them.
Second, do you have a comprehensive strategy for your insurance risk management throughout the life of the loan?
Henry Ford once said “if everyone is moving forward together, then success takes care of itself.” During my career I’ve seen financial institutions that had a great front-end process in place to gather insurance and efficiently transmit files and documents; however, too often they do not have a solid plan for loans that end up in the collections department. In some cases, a claim is quickly filed without any significant effort to resolve with the borrower, resulting in a rapidly-rising loss ratio. In other cases, there are allowable claims under the master policy that never get filed, contributing to a negative impact on the bottom line. However, I’ve also seen the industry’s best collections departments struggle with the negative impact of poor documentation and communication. This breakdown can result in unnecessary false placements. Having a thoughtful and specific set of procedures in place from origination to default, will make things better for you and your borrower. Further, to make sure that everyone is on the same page, communicating this information to your provider is key.
Finally, don’t let your program grow cold.
After making an informed decision regarding the insurance strategy for your loan portfolios, it’s important to recognize that things change over time. Not only is it possible that you will have changes in staffing, loan originations, and collections guidelines, but there are constant changes and evolutions in the tracking and lender-placed market. From technology to compliance, it’s imperative that you regularly revisit what you have in place to make sure it’s meeting your needs. Frequent partnership reviews and reporting are key in the short term; and doing a deeper analysis and market review is critical every 2-3 years. This will ensure you always have the right fit for your size.