Between an unsure economy and the uncertainty of war, credit unions are increasingly relying on insurance to mitigate the risky lending environment, according to several insurance experts.
"There's more of a trend back to CPI (collateral protection insurance). Most credit unions use CPI in some form, but now more than ever they're looking at the fact that they need to make the same money they did last year despite shrunken loan volumes, so they've got to find a way to make more loans," said John Pearson, SVP-national sales manager at State National Companies. "Insurance rates were up 8% in 2002, and are expected to be up 9% in 2003, so CPI becomes more relevant in this kind of market where people are piling up record debt, because either credit unions are going to start seeing a whole lot more defaults, or their members are going to stop taking on more debt. Neither of those things helps the credit union."
The evolving nature of credit unions is also playing a role.
"We're seeing a trend back to CPI due to increased risk based on several factors. First and foremost, credit unions are opening up their charters and fields of membership, and the more they start lending to people outside of single sponsors, the more they don't know those members as well as they used to," noted Gary Kirkindoll of CUNA Mutual Group, Madison, Wis. "We've also seen credit unions going a little further down the credit score spectrum, a loosening of their underwriting standards. Finally, there's the increased use of indirect lending."
Along with these potential risk factors, some CUs may be feeling the impact of members allowing their personal insurance to lapse.
"One of the main trends we are seeing is an increase in the cancellation activity for personal lines insurance. Many people have found themselves unemployed as a result of the numerous post-9/11 corporate layoffs," said Cindy Bryant of Allied Solutions, Dallas. "Replacement jobs and competitive salaries have been difficult to find and household budgets are stretched to the limit. Auto insurance tends to be viewed as an expendable household expense and is often one of the very last bills to be paid when money is tight. The end result is increased insurance cancellation activity. This will ultimately lead to an increase in the number of CPI policies that must be force-placed to protect uninsured loan balances."
The expanded FOMs and the struggling economy can also mean surprises from members credit unions thought they knew.
"It's gotten harder to predict how a member will do with a loan, even the A-paper members," noted Pearson. "Maybe they were an 'A' when you made the loan, and then they go home to a pink slip, and suddenly they're not an 'A' anymore. We used to be able to predict this better. Now, one minute a loan is good, and then the next minute-bang!- bankruptcy."
And that's having an effect on one of the newer trends in CPI: segmentation.
"Credit unions will say, 'look, these are A-paper members, we don't want to aggravate them and push them to go elsewhere," Pearson suggested. "So the question becomes, how do I not bother that person and still protect the credit union? Yes, these are your 'best members,' and they're probably buying their own insurance anyway, but there will be some who don't, and some who end up having problems, and they're the ones out there driving the brand-new Ford Explorers. You may have fewer claims on these people, but they're bigger claims, so you really have to be careful."
That's why it's important for credit unions to revisit their CPI segmentation to make sure it's working well, Kirkindoll observed. "Credit unions need to work with their vendors and do an analysis of their charge-offs and delinquencies to make sure that they've set the line (used to determine which members will be on force-placed coverage and which members will get traditional blanket coverage) is working," he advised. "It's a moving target. If you're seeing large losses happening above the line, then it's time to move it. This is where a credit union needs to stay close to its CPI company."
In fact, while it's a good idea to review CPI segmentation periodically, it's imperative if the credit union is expanding its field of membership and/or changing its underwriting guidelines-and that includes deciding to go to risk- based pricing, Kirkindoll added.
"If you had been making loans only to 'A' and high 'B' members, and then you decide to drop down to all 'B' members and even 'C-plus' members, you need to talk to your insurance provider," he said. "Especially if you haven't looked at your program recently, because you need to know how your coverage is effected by the loss ratios and understand that before it becomes a problem."
Bryant agreed. "Our CPI business has primarily been impacted by the diversification of credit unions' portfolios," she explained. "Many of our credit unions have implemented, risk-based, tiered or high-risk lending programs to serve a larger segment of the membership base. Insurance studies show a direct correlation between credit scores and insurance risk. Therefore, as the diversification of loan portfolios increases, the incidence of claims also increases. The resulting impact to the CPI program is higher loss ratios."
This, Bryant suggested, is where segmentation added onto a typical CPI program comes into play-allowing credit unions and their insurance vendors to track activity based on credit scores. "This customization allows credit unions to protect the relationship with premier members while quickly reacting on loans representing greater exposure," she added.