Defending Force-Placed Insurance - Collateral Risk

Originally Published - Jun 06, 2012

Thanks for taking time to look at the brand new Miniter Blog.  I'm Jim Gilpin, one of the principals here at Miniter Group.  I have held almost every job here at Miniter as we grew our company from the 6 New England States to insuring lenders in 42 states.  Currently, I head up Business Development.

Our business is helping our lender clients transfer their collateral risk.  So if we are going to talk intelligently about force-placed insurance, and not get all caught up in the hype, we have to understand collateral risk.  So let's jump in….

No bank is going to lend me $50,000 on my signature alone.  They need collateral to secure that loan.  My collateral might be a car, a home, commercial building, construction equipment or some toy like a boat or an RV.

Whena bank approves my $50,000 loan, it takes two types of risk.  The first risk is whether I will pay them back as agreed...simple...that's credit risk.  The second risk is that the value of my collateral doesn't decrease significantly….If it does, then I'm probably not going to pay the loan back...that's not so simple….that's called collateral risk.

Here's an example….I like to fish for Bluefin tuna.  Here in Massachusetts, Bluefin feed offshore about 18 miles on a place called Stellwagon Bank.  If I want to fish, I need a boat….so it's boat loan time.  When I go to the bank, they have me put down some money and give me the loan.  I had to bring my insurance policy to the bank showing that I had damage insurance on the boat.  The bank is listed as lienholder so they will get notices from my insurance company to monitor the insurance on my boat. 

Next spring, I forget to renew my boat policy and the insurance cancels.  I would never use my boat without insurance, but Ididn't know that the boat was uninsured, soI went fishing in early June.  On that trip, a Humpback whale breeches out of the water and lands on my boat….the boat splits in two and sinks….fortunately, I'm not hurt and get rescued by another fisherman.

When I get to shore and dry off, I go looking for my insurance policy...guess what! ….no where to be found...but you know what I did find….the loan payment coupon for my boat loan, due next week. 

I call my insurance company and they tell me my insurance was cancelled last month…..No policy, No coverage……..

Now….the $50,000 question…...Am Igoing to make that payment on my boat loan next week???

This is collateral risk….pure and simple…..

So I'm going to spend the next few weeks describing for bankers, insurance folks, regulators, lawyers,  the media and my fellow bloggers the details of how force-placed insurance really works.  This explanation will give you plenty of insight into why the industry that I love, and have spent a good portion of my life,  is now in a 50 state witch hunt.

Just to give you some background on me so you can see why I consider myself qualified for the discussion.:

  • Our only business is to supply collateral risk transfer solutions to lenders.  One of those solutions is force-placed insurance.  That’s what I've done full time (and then some) since 1997. 
  • In 2001, I was taught actuarial analysis by one of the best risk managers in our industry. (Notice I didn't say the biggest!).  I have an engineering degree, so the math wasn't that difficult.  All of our carriers accept my analysis of our portfolios on a regular basis. 
  • I graduated from the Consumer Bankers Association's Graduate School of Retail Bank Management in 2006.  I believe I am still the only insurance person to ever graduate from that school.  I figured if I'm going to work to protect banks and bankers, I better understand the theories of banking.
  • I took that knowledge from what I called "Bank Camp" and was appointed to the board of a bank here in Massachusetts.  The FDIC had a letter of understanding with the bank when I got there.  If you're not in banking, a letter of understanding is not a good thing….. The regulator equivalent to one foot in the grave.  That was 2006.  Lots of hard work by the new management team,  and the implementation of much of my graduate school thesis led to our bank becoming the best performing cooperative bank amongst our peers in the state of Massachusetts.
  • Starting in 2005, my team developed an entirely new way todeliver forced placed insurance.   We named it "Borrower -Centric Insurance Tracking"   You think we might have been ahead of our time????   We wrote our system from scratch….every line of code, every workflow.  We developed the software to bring the borrower to the center of our insurance tracking system.  We started marketing our system in 2007.  We service small to mid-sized banks….the right way, which is to put the borrower first….

Enough already about me…..The next part, will review the history of force-placed insurance.  This "ain't the first time" our industry's been to the legal rodeo!!!….  Does history repeat itself?  It certainly did with force-placed insurance….different cause, different time, same result….See you next week…..