Analyzing CPI – Are “Borrower’s Claims” Really a Member Benefit?
Last week I had the privilege of speaking to several executives at a mid-sized credit union about the differences between the CPI program they currently use to protect their consumer portfolio and the Blanket VSI policy that could replace it. We talked through the advantages and disadvantages of each, from the amount of staff time CPI takes compared to the simplicity of Blanket, the direct and hidden costs each program holds for the credit union (CPI has several hidden costs), and the perceptions each program can give to the credit union’s members. When we reached the point in our discussion about member benefit and perception, the credit union’s Risk Management Officer, (who was tasked with playing devil’s advocate throughout the entire meeting) brought up the subject of borrower’s claims and it led us to an in-depth conversation on this apparent benefit a CPI program may have for credit union members.
Blanket VSI programs are written as single-interest policies. This means that for a credit union to file a claim on a piece of collateral for which a member has allowed their private insurance policy to lapse, the credit union must repossess the vehicle. If there is a loss to the piece of collateral, but the member continues to make their loan payments, no claim can be filed, as the credit union has not suffered a loss. The member cannot file a claim under this policy.
See: Insurance Tracking and Force-placing CPI Coverage on Loans
Under a CPI program, when a member allows their private auto insurance to lapse, a policy is force-placed upon them to protect the credit union’s stake in the collateral. If the force-placed member suffers a loss to their vehicle but continues to make their payments, some CPI policies will allow the member to file a “borrower’s claim” to repair the damage to their vehicle. The Risk Management Officer Devil’s Advocate posited that this meant CPI, therefore, held an advantage over Blanket VSI for the member. Here’s why he was wrong:
CPI premiums are exorbitant, and their coverage is poor. Force-placed policies can cost as much as 20% of the loan balance. Force-placed policies also do not offer liability coverage, and they do not meet state minimums. This means that the member is paying way too much for way too little. They should not be encouraged to rely on this product to protect their vehicle.
Other members who are struggling financially are paying for those borrower’s claims. CPI programs are funded by the high premiums that force-placed members pay. Many of these members are struggling financially, which is why their private insurance lapsed in the first place. The money used to pay a borrower’s claim is coming out of the pockets of an at-risk population of members. Therefore, a borrower’s claim under a CPI program is essentially robbing Peter to pay Paul – not a fair way to do business.
Members have an ownership stake in the credit union. Borrower claims, which cut into the loss ratio in a CPI program, detract from the credit union’s bottom line. Therefore, when a member files a claim under this overpriced and inadequate policy, they are financially injuring themselves and all other members in the credit union.
Credit Unions are unique in their devotion to their members. It’s what makes them great. While the ability to file a borrower’s claim may sound like a member advantage of a CPI program, it’s just another way that CPI preys on those a Credit Union seeks to serve.