Creditor Placed Insurance Loss Ratios - Acceptable & Fair
When discussing or installing a creditor placed insurance program (“CPI”) we are often asked, “What will our loss ratio be?” This question is of particular interest to our clients who wish to capture the underwriting results of their CPI program via reinsurance. If we could answer that with 100% accuracy, we’d be in the prognostication business, well beyond the scope of risk management. As fun as making prophetic predictions sounds, we’ll leave that up to Miss Cleo. While we can’t predict the future, we do have significant experience in the creditor placed insurance space and can glean multiple loss performance-related insights based on information about a special auto or consumer finance portfolio.
Before we dive in, we need to address two overarching, generalized concepts concerning loss ratios as they pertain to creditor placed insurance programs. For the purposes of this blog we will call these concepts: Acceptable and Fair*. An acceptable loss ratio is low enough to make room for underwriting profit. A fair loss ratio high enough to keep that profit in check. In the most general terms, we aim to satisfy both standards.
Acceptable Loss Ratio
No one would assume the risk of entering into an insurance agreement with another party without the possibility of generating a modest profit. That much is understood. Many consumer creditors/auto finance creditors assume the underwriting results of their CPI programs, via reinsurance, to achieve this benefit. Therefore, the loss ratio needs to be acceptable. Creditor placed programs come with a 15%-25% ceding and admin cost, leaving between 75%-85% of collected premium as the “loss fund,” available to pay claims without resulting in an underwriting loss. To create a successful program, the loss fund must remain higher than the losses paid on average. Maintaining an acceptable loss ratio requires a premium charge sufficient to cover the creditor placed insurance program’s impending claims, yet not too burdensome on the account forced to pay the charge.
Fair Loss Ratio
When done legally, a creditor placed insurance program utilizes an admitted insurance policy issued by an admitted insurance carrier in the state or states where the creditor conducts its finance business. The insurance carrier (and therefore, by extension, the creditor utilizing the program) is required by the state insurance department to use rates anticipated to generate a loss ratio consistent with the insurer’s approved policy filings. Most CPI filings indicate a 60% loss ratio. Thus, loss ratios well below 60% uncorrected over time, imply the use of excessive rates, which is something insurers want to avoid. . What does this mean for the reinsured CPI program? Low loss ratios mean very profitable underwriting results. But, if loss ratios dip too low, the insurance carrier, or the state insurance department, may require a corrective rate reduction. So, the loss ratio needs to be acceptable to the party taking the risk, but ultimately fair to the party bearing the cost of the coverage.
At Berkshire Risk Services, our goal is to create stable and profitable CPI programs that can withstand regulatory scrutiny. One of the many ways we achieve our goal is by using our expertise to construct programs conducive to producing profitable and even-handed loss ratios. We enjoy talking about this stuff. We will continue to produce content looking at various aspects of creditor placed insurance programs, the regulatory environment surrounding them, and the benefits they provide to consumer creditors. Feel free to reach out to us with questions, commentary, or to explore what our agency can do for you.
*Acceptable and Fair are generalized concepts and not tied to or referencing any specific creditor placed insurance law or regulation.
