The Pitfalls of Portfolio Insurance Risk Management (and How Lenders Can Avoid Them)

Uninsured collateral poses a significant risk to lenders, and such circumstances require risk management. Lenders often try to manage their risk internally, but this can have detrimental consequences.   

For one thing, most lenders have neither the staff nor the expertise to manage their risk in-house. But on the flip side, hiring those resources can be expensive and labor intensive, which can be a drain on the lender’s resources. And if all tracking is done in-house, then there’s no transfer of liability. Some institutions opt to outsource insurance-related risk management, but this may result in a loss of control for the lender. 

It is difficult to strike the appropriate balance. 

With so many nuances such as proper notification to borrowers, proper handling of CFPB notices, correct calculation of required coverage amounts, and the proper timing of lender-placed insurance, compliance issues must be navigated. 

This is why it is important to select the right partner for your risk management needs. A partner that can advise you of best business practices on all hazards, particularly one with flood expertise extending from making the flood determination to the actual issuing of insurance. The right partner should also eliminate compliance issues, thus eliminating regulatory write-ups and costly penalties. 

Luckily, when outsourced properly, these pitfalls can be avoided. Outsourcing can save you time, which in turn saves money and resources. It also means that there is one project manager, so to speak, which has many benefits. One such benefit is that communication between all parties can be streamlined and documented. Most importantly, your partner should be experienced enough to make you aware of all risk management options and advise you of what they believe are the best business practice solutions for your portfolio.

Furthermore, a good partner mitigates risk, which is better for all parties involved. They should ensure that a lender remains in compliance in order to avoid stiff penalties. And it means that in any situation where the choices aren’t entirely black and white, there are experts to define the risks and propose solutions for you.  Lastly, and of significant importance, engaging with a partner enables the lender to transfer the liability.

In the case of lender-placed insurance (LPI), with the right partner, this means that LPI is a last resort and not a first-choice option. There needs to be a smart balance between insurance tracking and LPI. The bottom line is you want to minimize borrower impact while protecting your collateral.

Want to know more about outsourcing portfolio insurance risk management but not sure where to start? Looking for the right partner? We believe AFR is your answer. Our 30+ years in the risk management and flood business provides us with the tools and knowledge needed to work with you to find the best and most cost-effective risk management solutions. 

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