managing risk and balancing the borrower relationship
IF YOU HAD TO CHOOSE BETWEEN MAXIMIZING THE BORROWER RELATIONSHIP OR MAXIMIZING COVERAGE AND REDUCING CHARGE OFFS WITH YOUR COLLATERAL PROTECTION INSURANCE PROGRAM, WHICH WOULD YOU CHOOSE? AND YOU CANNOT SAY BOTH..YOU HAVE TO CHOOSE ONE..
THIS IS A HARD QUESTION BECAUSE IT REQUIRES GIVING UP SOMETHING AND PRIORITIZING THE GOALS OF THE PROGRAM. THE OBVIOUS ANSWER IS THAT YOU WANT BOTH! YOU WANT TO MAXIMIZE THE BORROWER RELATIONSHIP AND REDUCE ALL POSSIBLE CHARGE OFFS. THIS IS THE QUINTESSENTIAL EXAMPLE OF THE "POWER OF AND". WE DO NOT WANT TRADE OFFS!
WHEN YOU ARE SETTING UP YOUR PROGRAM OR DECIDING THE PROGRAM TYPE TO INSURE YOUR FINANCIAL INSTITUTION, THINK OF THE CUSTOMIZATIONS AND DETAILS AS "BUILDING THE BRIDGE" TO CONNECT RISK MITIGATION AND THE BORROWER EXPERIENCE.
TO MAXIMIZE THE BORROWER EXPERIENCE, IN THEORY YOU COULD NOT REQUIRE PROOF OF INSURANCE AND NEVER ASK THE BORROWER FOR A COPY OF THEIR INSURANCE. IF YOU DO NOT REQUIRE PROOF OF INSURANCE, YOU WOULD BE SELF INSURING THE LOSSES. IN THIS EXTREME EXAMPLE, YOU WOULD BE RISKING CHARGING OFF MORE LOANS DUE TO UNINSURED COLLATERAL IN ORDER TO NOT UPSET THE BORROWER OR REQUIRE THEY PROVIDE INSURANCE.
IN ORDER TO FULLY MITIGATE THE RISK OF CHARGE OFF FROM LOSSES DUE TO YOUR BORROWERS NOT HAVING INSURANCE, YOUR FINANCIAL INSTITUTION MUST REQUIRE PROOF OF INSURANCE DURING THE ENTIRE TERM OF THE LOAN. YOU MUST MONITOR THE PROOF OF INSURANCE STATUS AND FOLLOW UP WHENEVER THE BORROWER DOES NOT MAINTAIN ACCEPTABLE PROOF OF INSURANCE. THE FINANCIAL INSTITUTION WOULD ALSO NEED TO PURCHASE ALL AVAILABLE ENDORSEMENTS FROM ITS COLLATERAL PROTECTION INSURANCE PROVIDER TO COVER FROM MORE LOSSES other THAN JUST PHYSICAL DAMAGE TO REPOSSESSIONS.
bridge the gap, find that sweet spot!
finding the balance between borrower experience and risk mitigation determines the programs success.
how do you find that sweet spot?
you must know the primary goal of the program. has your program had historically high claims and paid losses? have you had borrower relationship issues or events that have caused you to lose borrowers?
items to determine the borrower relationship and the amount of risk mitigated:
-the limit of liability of coverage on your master policy
-the rate charged to the borrower
-the deductible allowed on a borrowers policy
-the optional coverages endorsed on your master policy
-the amount of insurance required on a borrowers policy
-how you choose to insure condominiums
-the exceptions you make on a policy or the exceptions you make for a borrower
if you can absorb potential charge offs, it may make sense to your financial institution on being more lenient with your borrowers providing proof of insurance. if you are not in a position to be able to absorb potential charge offs, you will want to require your borrower to have acceptable insurance without any exceptions.