Force-placed CPI Insurance – Is There a Better Way?
Force-placed CPI insurance is frustrating, cumbersome, and expensive. Is there a better way to transfer the risk that CPI covers? A credit union executive recently shared the thought that “those expensive force-placed premiums just don’t feel right.” It was clear that the CPI (Collateral Protection Insurance) model of tracking insurance and then force-placing expensive insurance premiums onto their most vulnerable members did not sit well with her. She said, “there has to be a better way.” In the big business of CPI, it is rare that other alternative options are offered or even discussed by the big CPI vendors. Might the huge premium dollars of force-placed insurance be shielding more efficient and member-friendly solutions that exist out in the marketplace?
The model of CPI – tracking insurance and force-placing upon a perceived lapse in insurance – can be viewed as a program based on adverse selection. This is not a good model for any insurance product since it drives costs way up. Members that are struggling financially who tend to be higher sources of claims normally bear the brunt of a very expensive CPI program for the credit union. Does this type of solution fit the most core principles of the ‘credit union mantra’? No doubt that the small percentage of members that fail to keep proper auto insurance is a risk management problem for a credit union, but there must be a balance between risk management and member experience. How often do compliant members get wrapped up in a force placement made in error and complain about expensive insurance that has increased their monthly payment? Many times these disputes and escalated complaints burn a bridge that cannot be repaired with the member.
Is CPI Fair For Your Auto Loan Borrowers?
In another recent conversation, a leader at a credit union shared that “CPI is by far the worst ‘product’ that we offer our members”. This acknowledgment by him was startling, as it was clear that he felt CPI was his only option. He knows the cumbersome and frustrating nature of CPI and recognizes some aspect of how expensive CPI is to their bottom line but felt stuck in that model. How unfortunate that, in his case, it appears the big dollars generated by CPI suppressed offering other solutions for his credit union and his membership.
Best Option for Lender’s Collateral Protection Insurance
In theory, only the misbehaving members that fail to keep proper insurance are the ones that pay for the expensive CPI program. But, this is just not the reality of any CPI model. 100% of those expensive force-placed premiums are paid for upfront by the credit union, with the hope of being ‘reimbursed’ by the member through the loan payoff. It is widely known that force-placed premiums are a catalyst for delinquency and default. When the loan defaults, the credit union is left trying to collect on that fronted expensive premium. Some CPI programs attempt to put controls in place for these scenarios, but these ‘controls’ are always to the benefit of the CPI provider with loss ratio calculations minimizing any ‘refunds’ of CPI premium. How much force-placed premium is charged off annually by credit unions? This type of solid analysis by a credit union can be eye-opening, no matter the institution’s size. Sure, some providers will pivot to a ‘hybrid CPI model’ in an attempt to shore up the business with the credit union, but is this ever offered proactively? Most likely not, as the guaranteed premium dollars will dwindle. In the grand scheme of things, this type of adjustment to hybrid can be viewed as only a band-aid on a broader problem.
Top Legal and Compliance Benefits of Blanket Insurance
Credit unions are busy serving their members — this is a fact. Analyzing the true financial impact of a CPI program can be time-consuming, and most providers steer a credit union away from that type of detailed analysis. From the perspective of keeping the focus on a better member experience, there are alternative options that eliminate CPI altogether (like Blanket Single Interest protection). If a member-focused approach is the goal, a comprehensive review of that CPI model is worth the time. Better solutions do exist and you can’t always count on your CPI Provider to educate you without bias on other options. It just takes some focus and time to see if there might be a better fit and a better way.
