Exploring Options for Protecting Your Collateral: Insurance Tracking vs. Blanket Policy

In the world of lending, safeguarding collateral is paramount. Based on my experience, lenders typically adopt one or a combination of the following four strategies to manage this risk:

• At Loan Closing: Lenders typically verify proof of insurance (POI) and may not actively track it further, except for flood insurance, which is monitored for compliance either internally or by a third party.
• Internal Tracking: After confirming POI at closing, some lenders choose to monitor insurance coverage internally throughout the loan servicing period.
• Outsourcing: Another approach is to confirm POI at closing and then delegate the insurance tracking responsibilities to an external service provider.
• Hybrid Approach: Some lenders verify POI at closing and employ a mix of both insurance tracking and blanket policies across their portfolios.

The most suitable lender services strategy varies depending on several factors such as geographic location, types of collateral, loan values, and more. Each method also carries different cost implications.

The Costs and Risks of Not Tracking

Opting not to track insurance might seem cost-effective initially, but it exposes the lender to significant potential losses. Blanket policy premiums can escalate as insurers account for the unmonitored risk. Moreover, not tracking insurance can lead to a lack of control over the portfolio. If blanket coverage proves insufficient and tracking becomes necessary, gathering and organizing POI from borrowers is a substantial task.

Internal Insurance Tracking Challenges

Tracking insurance internally is labor-intensive and tedious, often resulting in high staff turnover. Any oversight can lead to uninsured losses, typically borne by the lender. While outsourcing tracking can reduce costs, it's not guaranteed and varies based on the service level and local wage rates.

Outsourcing Insurance Tracking Challenges

Outsourcing tracking involves clear costs, such as service fees, but also less visible expenses. Some firms charge minimally, hoping to profit from force-placed insurance, which negatively impacts borrowers. Others charge more but offer robust insurance tracking platforms and seasoned insurance analysts, aiming to enhance efficiency and reduce the need for force placement and negative borrower outcomes.

Blanket Insurance Policies and Their Complexities

Blanket insurance covers a wide array of collateral types, from residential and commercial properties to personal and heavy equipment. For lenders using this method, it is crucial to maintain accurate collateral codes and loan types in their servicing platforms to ensure appropriate coverage segmentation. While setting up blanket policies can simplify management, the lack of monitoring can lead to portfolio control issues, with increasing renewal premiums compounding the challenge.

Making an Informed Decision

Deciding on the best method to protect your collateral involves serious consideration. Engage with insurance professionals and peer lenders to explore and choose the most effective strategy tailored to your specific needs. There are excellent customizable solutions available that can adeptly meet both protective and compliance demands.

This nuanced discussion highlights the importance of choosing the right approach to collateral protection, weighing the costs, benefits, and potential risks associated with each option.

AFR Services offers a suite of loan origination tools, loan servicing solutions, and flood insurance services tailored for financial institutions and insurance agencies. Serving our clients for more than 30 years, with an entirely-US-based Support Team, we deliver solutions and services that are unmatched in our industry. Reach out to our team today to learn more.