REASONS FOR INSURANCE TRACKING AND MANAGING RISK
Management is called on daily to make risk management decisions to maintain the profitability of their loan portfolio and reduce lender liability. Traditionally, lenders have had limited options available for risk managing a portfolio's insurance needs. The lender could either retain the risk by attempting to monitor or track uninsured collateral internally or by transferring the risk to an insurance company through either a blanket insurance policy or a force place insurance program. Not only have lenders faced limited options, but their options inevitably left the lender feeling OUT OF CONTROL regarding the management of the insurance requirements of their portfolio.
The key ingredient in managing a portfolio's insurance needs is complete, timely, and accurate information. An effective insurance tracking program can put the lender IN CONTROL of their portfolio by providing informative reports giving the lender up to date insurance status.
With complete, timely and accurate information, risk management can be proactive rather than reactive. When risk is properly managed, all proactive follow-up actions will work together to reduce losses, lender liability and borrower ill will.
AFR's Insurance Tracking Service is designed to put the lender BACK IN CONTROL of their portfolio, transfer the risk, and provide solutions to the shortcomings of traditional portfolio risk management.
The pitfalls of traditional portfolio risk management
Lenders must establish a risk management plan to minimize losses incurred due to the lack of insurance protecting their collateral. Traditionally, lenders have had the following three options, each of which has significant flaws.
1. Internal Risk Management….Retaining the Risk (self-insurance)
Under internal risk management, the lender retains and manages risk internally. The resulting problems of a lender/servicer practicing internal risk management include:
- The time consuming task of handling massive amounts of insurance mail
- Lack of training due to employee turnover and thus a lack of expertise in understanding and handling insurance notices
- Lack of follow up to obtain proof of insurance
- No transfer of liability
- Expensive, if done correctly
These problems ultimately result in growing liability and potential collateral loss for a lender due to an increasing pool of uninsured collateral.
2. Force Placed Insurance Program
Under a force placed insurance program, the lender/servicer receives "free" insurance tracking from an insurance company. In exchange, that insurance company receives the exclusive right to force place insurance. The problems relating to force placement programs include:
- Lender LOSES CONTROL of when to force place insurance
- Increasing cost to lender due to force place insurance premiums paid by lender
- Increasing borrower ill will due to unnecessary force placed insurance
- Increasing lender liability regarding RESPA violations and class action litigation (On November 17, 1999 the Housing and Urban Development, which governs RESPA, released a memo specifically addressing Section 8 of RESPA which prohibits "the payment and receipt of a fee or thing of value in return for the referral of settlement service business for a federally related mortgage loan" (i.e. free insurance tracking)).
3. Blanket Insurance Policy
Under a blanket policy the lender purchases a single policy covering their entire portfolio to transfer liability. Potential problems include:
- A blanket policy does not eliminate the need to track insurance
- Should a lender elect to stop insurance tracking, and rely solely on a blanket policy, a growing pool of uninsured portfolio loans will occur
- Cancellation of the blanket policy by the insurance carrier due to claims
These traditional approaches have proven to be ineffective, cumbersome and costly ways of monitoring portfolio risk. In many cases, lenders have surrendered to these difficulties and chosen to do no risk management at all! However, lenders are now finding that the longer they have been without insurance monitoring systems, the higher the variance between expected and actual losses. For example, when a lender's insurance tracking systems are in place on a typical automobile portfolio, the number of loans in the portfolio, which are not in compliance average 16%. In contrast, when insurance tracking systems are removed, the loans not in compliance average 49% in states with financial responsibility laws and 59% in states without. This increase in non-compliance occurs rapidly, normally within the first 16 to 24 months. When a lender does not monitor their portfolio, they cannot take the follow up actions necessary to control risk. Only insurance tracking, combined with appropriate follow up actions, can attain the goal of controlling a lenders portfolio risk.
AFR Insurance Tracking (the AFR solution)
AFR offers insurance tracking services designed to overcome the deficiencies of the traditional approaches mentioned previously.
The most important component of any risk management plan is the underlying tracking and reporting system. AFR's system provides management with the information necessary for deciding when and how to modify their risk management plan. AFR Services has the knowledge, experience, and commitment to provide all your insurance tracking and compliance needs.
AFR Insurance Tracking Services differ from force placement programs in that we are not dependent upon the force placement of insurance to generate revenue. Force placement programs produce negative customer relations. Our monitoring program keeps the lender in control by giving the lender the option to send notifications and works toward the goal of motivating the borrower to purchase insurance. AFR accomplishes this by scrubbing and uniformly organizing a lender's insurance information for each portfolio loan and managing the lender's insurance documents, borrower notices, borrower calls and providing the lender with comprehensive reports.
Successful insurance tracking demands timely and accurate updating of all insurance information, correct notification to borrowers and extensive insurance knowledge. With this in mind, AFR Insurance Tracking features include:
- Program flexibility designed to meet a lender's specific needs
- Organizing your insurance information on each loan
- Processing all incoming insurance documents
- Accurate and consistent document tracking
- Customized management reporting (exception list for lack of insurance)
- Customized notice production and mailing
- Correspondence with borrowers, agents and insurance companies
Call center services (including inbound and outgoing call support)
- Insurance documents storage
- Complete notice and insurance history
- Notes subsystems providing the ability to document telephone conversations and activities pertaining to an individual loan
- Portfolio audits
AFR’s Insurance Tracking service will put you back in control of your portfolio, free your personnel to work on more productive tasks, reduce your portfolio risk and do it all with the highest level of service. Whether you need help with hazard, flood or vehicle insurance tracking, contact AFR at 1-800-995-8667 and ask to speak to a marketing representative. You will find AFR is the solution to your insurance risk problems!