Common Objections to VSI (Part One)

As I have met with lenders over the past three years, many have heard of blanket insurance coverages. Oftentimes, blanket insurance comes with an understanding that a blanket policy carries more “risk” than a CPI policy.  CPI has become the industry standard for tracking and force placing insurance on auto loans, and that has come at the detriment to lenders, members, and borrowers. Almost daily, I hear lenders say, “there has to be another way,” but when we talk about blanket insurance, there is a negative aura around it, and it often comes with the same initial objections. 

This article is the first in a series of two that discusses some of the most common objections to VSI that I hear from financial institutions. 

Why should I charge all of my borrowers for coverage when only a handful are causing the insurance problems?

This is the question that I hear the most, and I can see the merit in it. With CPI and force placing insurance, lenders are told that vendors will track insurance for them, and force place whenever there is a lapse in coverage. Only the “bad apples” of the portfolio will have to pay for the program. On the surface, this feels like it’s the fairest way to cover a portfolio. However, this approach to insurance doesn’t work for multiple reasons. Read on to find out why.

First, the tried-and-true model of insurance is that everybody pays a little bit, and uninsured losses are covered by the small payments of many, this is true of the blanket insurance approach. Tracking and force placing insurance uses adverse selection, meaning that you are only insuring the riskiest borrowers, which causes force-placed insurance policies to be exorbitantly high while providing extremely limited coverage.  

Read: Could Your CPI Bring You Legal and Compliance Troubles?

Second, instead of viewing the borrowers that aren’t carrying insurance as “bad apples,” I would like to flip that on its head. The members that aren’t able to carry full coverage insurance are typically the most vulnerable members of a lending institution’s portfolio. Aren’t community lenders supposed to be there to help their communities in times of need? CPI requires lenders to force place 15-22% of the loan balance annually on their borrowers while the policy doesn’t even meet the minimum requirements for carrying insurance. Usually, these are the borrowers that are already struggling, and CPI pushes them further into delinquency. Oftentimes lenders see a decrease in delinquency and charge-offs after switching to a blanket policy because they are no longer punitively punishing their struggling borrowers with expensive force-placed policies. 

Blanket Insurance Premiums consistently increase as we file claims. How can we be sure that our premiums aren’t going to keep increasing year over year?

I hear this objection almost as frequently as the first, and it shows me how CPI vendors are spreading misinformation to their customers (Insurance providers make significantly more money on CPI policies over blanket policies). Unitas Financial Services has been providing blanket insurance solutions for 27 years and has never had a lender switch to blanket insurance and go back to CPI. Furthermore, we have many customers who have had the exact same insurance rate on their portfolios as when they started years ago (even though the price of vehicles continues to increase). From a true insurance perspective, CPI premiums will be raised on a more frequent basis than blanket premiums. The Law of Large Numbers is a guiding insurance practice that is used to predict losses. It states that if the amount of exposure to losses increases, then the predicted loss will be closer to the actual loss. Since blanket policies take every loan on a portfolio into account, the Law of Large Numbers applies to underwriting, giving a much cleaner underwriting approach. CPI has to rely on a very small (less than 1% of a portfolio) amount of loans to underwrite correctly and is consistently adjusting premium rates. 

Read our related article: How Blanket Insurance Premiums are Calculated

Read part two of this series, which discusses charging a fee on our loans and coverage that protects only the lender. Read part two here.