High Unemployment Increases Risk to Auto Loan Portfolio

The rise in uninsured motorists endangers collateral.

October 15, 2010

The stalled U.S. economy has not only aggravated the downturn in credit union new vehicle loans, it has put the industry’s portfolio of current auto loans at greater risk—adding another recession-related pressure point to credit union bottom lines.

Uninsured Motorist Rate Mirrors Jobless Rate

The Insurance Research Council (IRC) projected in 2009 that an average of about one in six U.S. motorists will not have auto insurance in 2010. The rate varies greatly by state.

The 2010 national average may be even higher than the forecasted 16.1% because the national unemployment rate, at 9.5% through June, is higher than the rate used by the IRC to make the forecast.

Every two years, the IRC estimates the rate of uninsured motorists by collecting auto claim statistics and measuring the percentage that involved uninsured drivers.

Prolonged high unemployment historically means that more motorists allow their insurance to lapse, according to the Insurance Research Council (IRC). Given the grim outlook for U.S. employers, it makes sense to review how your credit union protects its auto loan portfolio against uninsured collateral.

In particular, credit unions that self-insure against defaults caused by physical damage loss on uninsured collateral should take a close look at their process of managing the cancellation and renewal notices from insurance companies.

Methods of managing this process run the gamut. Some credit unions dedicate staff to maintaining files of up-to-date renewal notices for each vehicle loan and following up with members on cancellation notices. Other credit unions simply run insurance documents through the shredder.

However your credit union handles this, consider that exercising your lien holder’s right to a valid proof of insurance is not only a fiduciary duty, it benefits members who might need prompting to keep their coverage in force.

What’s your exposure?

Whether your credit union uses collateral protection insurance or self-insures, you may want to assess whether your credit union has taken on more risk since your last review of collateral risk exposure.

Here are three events that commonly add to a credit union’s collateral risk exposure:

1. High unemployment. If the employment rate among your field of membership is similar to the national average of 9.6%, you can expect an uninsured motorist rate of more than 16% in 2010, compared to 13.8% in 2007, IRC reports.

2. New select employee groups or an expanded charter. A standard explanation from credit unions that self-insure against defaults from damaged collateral is, “We know our members. We know the risk.”

This can certainly be true, especially among smaller credit unions. But if you expand your membership and/or the territory you serve, don’t forget to reassess and adjust your collateral protection program.

3. New lending policies or strategies. Credit unions are getting creative at finding new sources of auto loans—a good thing. But again, if you’re reaching outside of your established markets, you may be taking on unanticipated risks.

An obvious example is a new or significantly expanded indirect lending program.

Don’t wait for large auto loan charge-offs to hit your credit union’s bottom line. The economic outlook remains uncertain, and your credit union may need additional protection for years to come.

ERIK VANDERMAUSE is CUNA Mutual Group’s director of product management for collateral protection. Contact him at 800-356-2644, ext. 8120.

Coverages available through CUNA Mutual’s Collateral Protection program are underwritten by CUMIS Insurance Society Inc., a member of CUNA Mutual Group; State National Insurance Company; National Specialty Insurance Company; and Assurant Specialty Property. Product availability and features may vary by jurisdiction and are subject to actual policy language.

For questions about CUNA Mutual’s comprehensive suite of collateral protection solutions, including the alliance with State National Companies to deliver Tracked CPI to credit unions, contact your CUNA Mutual Sales Executive at 800.356.2644, or visit our collateral protection web page.