Part I – Let’s Challenge the Force-Placed Insurance Business Model
We’ll get the group off to a fast start by challenging the force-placed insurance business model. I’ll get us started by giving an overview of the legacy business model that has been in place since the days of force-placed insurance before Dodd-Frank.
As we advance any of our discussion in this group, we will always look at an issue through the eyes of the stakeholders, which in most cases will act like a three-sided prism, with the three sides representing:
The Borrower’s View
The Lender’s View
The Insurance Tracker’s View
Here are the traditional stakeholders’ views:
Borrower: Does not wish to be force-placed, especially if they have insurance.
Lender: Wants a low-cost solution to transfer portfolio risk for safety & soundness.
Tracker: Offset the expense of the insurance tracking operation and make a profit.
We will spend much time in the future discussing how we can align the goals of the stakeholders, but for now, we will look at how the industry is currently addressing these views in the current force-placed insurance business model.
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The Business Model
The lender’s loan servicing department could do the best job tracking and servicing their borrowers’ insurance needs. However, folks in the loan servicing world know this is an expensive proposition, and management wants to reduce loan servicing non-interest expense (NIE).
Under pressure to reduce costs, loan servicing management looks for an outsource insurance tracking vendor to bring systematic efficiencies and ultimately reduce the NIE associated with tracking their borrowers’ insurance.
The outsource insurance tracker understands that the lenders need a low-cost solution, so they offer insurance tracking for free, or below their cost to meet the NIE reduction objections for the lender.
Who will pay the insurance tracking bill?
We make the assumption (or we can debate it in our group) that ultimately, the borrowers are paying the cost for insurance tracking.
If the insurance tracker is providing a service below cost, or at no cost, how do the insurance trackers make a profit? The answer is by the borrower paying the force-placed insurance premium. The commissions from this premium is the revenue for the insurance tracker.
So let’s review our prism:
Borrower: Pays for force-placed insurance premium
Lender: Outsources insurance tracking reduces Non-Interest Expense
Tracker: Gets paid from the commission of the force-placed insurance policy and possibly some tracking fees.
Historically in any loan portfolio, be it a vehicle portfolio or a mortgage portfolio, only one to two percent of the borrowers are force-placed at any instant in time. Those borrowers generate the commission for the insurance trackers. The other 98 percent of borrowers are insured and generate no revenue for the insurance tracker.
Everyone up to speed?
So here is the rub that I want to discuss in this first post.
Is it fair (or compliant) for two percent of the borrowers to pay the majority of the tracking costs of the other 98 percent of borrowers in the portfolio?
Any opinions? Please comment within the LinkedIn Group “Bankers & Force-Placed Insurance” so that we can keep the discussion within the group.