Insuring The Bottom Line
Squeezed margins are pushing credit unions to seek out non-interest income opportunities to bolster their Return On Average Assets (ROA), and two experts suggest insurance is one fertile area some CUs haven't maximized.
"Insurance products can be a pretty good source of non-interest income," said Judy Tharp, CUNA Mutual Group VP-lending solutions development. "But we also try to help credit unions generate more loans so they'll have more loans on which to place protection."
In other words, it's the opportunity to bump up both non-interest income and interest income.
One of the potential ROA gems credit unions are still learning about: their non-prime borrowers. "Credit unions are typically pretty conservative lenders, but they have the challenge of serving the underserved," Tharp observed. "Default insurance is one way to enable credit unions to lend deeper. It's a new product that helps bring in more loans and that, in turn provides more opportunities to place default protection."
Non-prime shouldn't be confused with sub-prime, Tharp added, noting CUNA Mutual's product-which is for auto loans only-is designed to go down to a credit score of 580.
Bread & Butter Back On The Table
One product that's been around for a long time but has been underutilized, she suggested, is mortgage default protection, called CMGMI at CUNA Mutual Group, but more commonly known as PMI, she added.
"For years, auto lending was the bread and butter for credit unions, but last year 60% of loan growth came from real estate loans."
Despite the cooling housing market, Tharp suggested real estate loans continue to be a major opportunity for credit unions because their penetration in this area has been low historically.
"I'd like to see credit unions be more aggressive in the purchase mortgage market," she offered. "Even though the market is slowing, this is a good opportunity to build expertise." And PMI, she noted, is part of the revenue engine that comes with these loans.
"Credit unions have the ability to expand the loans they make through segmented marketing," Tharp noted. "If a credit union has a new community charter, it's not good to just mass market, but you can target market by credit score, for example. This is not a new thing, but it is one of those hidden opportunities to capture new loans or recapture existing loans from another financial institution. When credit unions make more loans, they increase the opportunities to place insurance products on them."
The challenge, she said is teaching lenders the cross-selling skills and recognizing the needs of their members. "When credit unions focus on ROA, one of the things they have to look at is non-interest income, and that typically means charging a fee, and that is painful to credit unions. The beauty of placing protection products on loans is that it's a way to generate revenue while also providing value to the member."
A Loss Mitigator
That's where GAP insurance, collateral protection and credit insurance can come into play, both Tharp and Pearson said.
"Collateral protection insurance isn't necessarily a revenue generator, but it can help greatly with ROA in the sense of being a loss mitigator," Pearson related. "There is expense reimbursement to be had."
And that reimbursement isn't insignificant. "When we run a value analysis of CPI it's pretty consistent that we find about 20% of your charge-offs would go away. That's usually enough to get their attention."
Pearson suggested credit unions periodically review their CPI and compare it to other CPI products on the market to make sure that what they have really is the best offering for them.
Credit unions can-and often do-maximize offerings such as GAP insurance by playing to their strength: their relationships with their members.
"One of the interesting things we see is that because credit unions do such a good job with their members, most of their members will take the insurance if the credit union offers it," Pearson reported. "When we compare [credit union sales of GAP insurance] to some of our other financial partners, that don't keep as close tabs with their customers is that they don't have the penetration numbers credit unions do."
The key then, he suggested, is making sure frontline staff understands the tangible benefit to the member so that instead of thinking of it as "selling something" to the member, it's offering valuable protection to the member.
"It's because credit unions really care about their members that makes them perfect for this product," he added. "When the dealer offers this product to a customer, they really sock it to them. Credit unions can offer the same product at half the cost, offer a great value to their members, and have income they can be utilizing right now. Plus a credit union is much more likely to remind a member that he's got this protection if and when the time comes that the member should need it. You just don't see that kind of follow-through from a dealership. They just want to sell the product. Credit unions want their members to benefit from it if they end up needing to use it."
That same value relationship should apply to credit life, Pearson suggested. "The biggest thing we come across with credit life is very low penetration," he said. "And that's all about training. We tell credit unions, training is usually good for about 90 days, and then it's time to train again."
Revenue Generator In Disguise
And if ever there was a revenue generator in disguise, Pearson offered, it is training.
"There is money in training," he commented. "We always see penetration levels jump right after training. You want revenue? Put together a more regular training approach."
While GAP and credit insurance have been around for a long time, debt cancellation is a relatively new product about which credit unions are still getting the lay of the land.
"There's a lot of interest in it, but there are few who are already into it," Pearson said.
"It's very similar to credit insurance, but the important difference is that it is a contract between the credit union and the member," Tharp emphasized. "It offers a little more flexibility in terms of what it can protect against, such as unemployment instead of just death and disability."
Indeed, Pearson said there's a whole host of potential protections that can be created under debt cancellation, including, for example, in the event of divorce.
The hidden pitfall is a potential loss of focus among the sales staff. "If you've got 25 options available, you think that's all the more business you could be doing, but your frontline staff has to be comfortable with and conversant on all of those options if they are really going to sell them," Pearson advised. "What we have found is that a sales person loses focus after about four or five things, so you want to start off with just a couple, let your staff get comfortable with those, and then add a few more later."
Although debt cancellation has been around for a couple of years, Tharp said she hasn't seen significant penetration in it, which means there's still a good-sized opportunity there-particularly in light of the way loan terms have been stretching out of late.
"With loan maturities extending, it is making this product more appealing," she related. "So many people are upside down in their car loans."
The Importance Of Selling Loans
If it sounds like Tharp is almost more focused on loan generation than on insurance products, that's not far off. "Sometimes we want to take the easy way out," she said. "The insurance products and other non-interest income is a great way to generate revenue, but don't forget to focus on your loans, too. If you don't have the loans, you can't sell the insurance, after all."
Some things credit unions should consider, she said: ways to keep increasing the speed of loan processing, and outsourcing a variety of functions, such as collections and vehicle disposal.
"It's another way to work on that margin," Tharp commented. "Two areas that credit unions really ought to be outsourcing are title administration and disposing of repossessed vehicles. Both of these are pain points for credit unions, so why hang on to them in house? Title administration is a huge undertaking for credit unions. I just don't understand why more credit unions don't outsource these processes."
As CUs continue to hone in on ROA, Tharp and Pearson said insurance is rife with potential cost savings and revenue generation, and the keys for maximizing those opportunities lay in the relationship with members, consistent training, and outsourcing.