With Inventory Costs Up, Should Lenders Re-Evaluate Their CPI Rates?
As we head into the final quarter of 2021 many industries are in that awkward stage of adjusting to the “new normal” caused by the pandemic and navigating their business through some of the latent effects caused by 2020. One of the biggest pandemic-driven changes experienced by the Buy Here Pay Here and subprime auto finance industry is increase in cost of used auto inventory. Depending on where you look, experts are projecting the lack of new automobile production to extend many more months, and in some cases, over a year. No new autos mean used inventory pricing isn’t getting relief any time soon. Dealers and finance companies that utilize CPI may need to re-evaluate their CPI rates to ensure they are maximizing the results of their risk management efforts.
The pandemic-driven increase in the cost of used auto inventory has driven the severity of auto physical damage claims up. As people are returning to work, the frequency of auto physical damage claims are on the rise. What does this mean for lenders with CPI programs? Claims payments are increasing and lenders are turning in more of them than they were earlier in the year. That’s a recipe for an increased, and possibly unsustainable, loss ratio. An effective way to fight rising loss ratios is to increase the premium collected.
The solution to collecting more CPI premium may seem obvious: Increase the rate. If a lender’s loss ratio supports a rate increase, and they are successfully collecting nearly all of their outstanding premium, this could be the easiest way to increase premium to account for higher and more frequent physical damage losses. If a lender isn’t successfully collecting all outstanding CPI premium, a decrease in CPI rate may bolster collection success, raise premiums, and improve the loss ratio to an acceptable one. In some cases, a small rate reduction can yield higher overall collections. Each lender’s portfolio has different characteristics and will require different adjustments to ensure CPI success.
CPI providers watch loss ratios and will often respond with solutions when losses trend upwards. Of course, that’s no reason to ignore the trend yourself. With used auto price declines nowhere to been seen on the horizon, now is a great time to reassess your CPI program to see if you need to make any changes. If you want some help assessing your current program, reach out to us and we would be happy to help.
