It’s on your mind as you drive home every evening: What else can I do to maximize my credit union’s capital position?
One answer is look at risk as a way to surface new opportunities. If certain borrowers aren’t insuring collateral, your credit union—and your members—bear the risk.
Collateral protection insurance (CPI), however, passes the cost along to only those members who aren’t carrying insurance instead of spreading the cost across the entire membership.
CPI is a great way to avoid making the vast majority of members who do carry insurance from paying twice—once for themselves and then again for uninsured borrowers.
Other credit unions prefer not to force-place insurance on their membership, but they still need to manage their risk. These credit unions look to blanket programs for the protection they need.
Both perspectives are appropriate and the protection needs to fit with your philosophy and must allow you to shape it to fit your exact needs.
Three other insights to consider about CPI:
1. You might need CPI now—even if you never needed it before
Competition for loans has never been greater. Members are paying off their balances faster than ever, and capturing new loans continues to become more difficult.
If your credit union is trying to grow its loan volume, you may be widening your range of eligible borrowers to include those with slightly lower credit scores. Since risk rises as credit scores drop, CPI could become a prudent choice—even if it wasn’t the last time you did the cost-benefit analysis.
In addition, your membership’s credit health is likely to change over time due to external economic factors or industry-specific events.
For example, consider a credit union that draws a large percentage of its membership from a research lab with well-paid, highly educated, and stable employees. Imagine that the business is sold, and the purchasing company moves some employees out of state and lays off the rest.
Some of the laid-off members could begin to struggle with payments, and the average credit union borrower quality could deteriorate without the stabilizing force of the lab’s entire employee pool.
2. Not all CPI programs are equal
Every CPI carrier is different, and so are their coverages.
Some of the differences are nuanced and subtle, which means credit unions really need to pay close attention to their policies and understand what is included.
This isn’t easy to do. One way to compare apples to apples is to ask your prospective carrier for a claims review—using actual claims from your files.
You will find that one might award a claim of $8,000 while another (maybe your current carrier) would have/has paid only $5,000. This can really add up over time.
If your collections department receives incentives based on dollars recovered or saved, as most are, getting the most from the claim should be high on their radar.
Talk to other credit unions, too. Ask colleagues which companies they use for CPI, how long they’ve used them, and whether they used a different company in the past.
A credit union might have had a problem with a carrier that you are considering, and it is helpful to know what potential issues might be so that you can address them in your decision-making process.
Lastly, verify that your CPI provider is also the carrier. Most are not, and that extra distance between you and the insurance carrier can cause delays that you don’t have time for.
3. You could be underutilizing your current CPI program
Most credit unions understand that CPI provides coverage when a vehicle is damaged or stolen. Yet there are other costs associated with CPI claims.
A car is not repossessed for free—towing could cost $300. A truck might sit on a lot for a week accumulating daily storage expense, and someone gets paid for that.
Some CPI policies cover these ancillary expenses, and yet credit unions do not always file claims for these costs. Ask your current provider for an analysis to determine whether you are fully utilizing your coverage.
Keep in mind that policies may not allow you to go back two or three years to collect, so understand the terms up front so you don’t leave money on the table.