simply put. increasing average outstanding auto loan balances. Americans are financing more of the purchase price than ever.
the average amount financed per vehicle in the third quarter was $41,347, compared with $38,315 a year earlier, according to edmunds.com. and 14% of auto loan customers during the same period took on a monthly payment of $1,000 or more, up from 8% a year earlier.
traditional cpi is designed to generate more premium from the larger auto loan balances and less premium from the smaller auto loan balances. the premium is based on a percentage of the outstanding loan balance. the premium generated is directly proportionate to the risk of loss.
hybrid cpi is designed to keep the monthly payment increase low, to reduce delinquency. this is accomplished by having a flat monthly rate for all loan balances. the issue is that a $10,000 outstanding loan balance generates the same amount of premium as a loan with a $100,000 outstanding loan balance.
blanket lenders single interest (blsi) is designed to charge all new loans at loan origination, whether the borrower is insured or not. the issue is that the premium charge on new loans is a flat one-time rate and generates the same amount of premium as a loan with a $10,000 outstanding loan balance or a $100,000 loan balance.
summary
the cost of vehicles is continuing to increase, along with auto loan rates, resulting in average outstanding loan balances that are not likely to come down anytime soon. it is likely that flat rate premium programs such as hybrid cpi and blanket insurance will result in higher loss ratios than a percentage based premium program, such as traditional cpi.
creating a sustainable collateral protection insurance program over the long term is the key to reducing charge offs, keeping the program affordable, and successful.