Our previous blog discussed the responsibility financial services companies have to manage every aspect of their compliance burden as effectively as they manage any other risk to their enterprise. Another area that should not be ignored in this respect is compliance as it relates to the processing of automotive insurance claims. This is one area where many institutions who service mortgage loans often fall short.
Expert risk managers excel at prioritizing threats and scheduling actions based on those assessments. Because home loans have a much higher balance per transaction than other forms of lending that an institution might be involved in, it is tempting to place a lower priority on automotive claims recovery when managers are deploying their compliance-related resources or allocating budget for expert third-party support.
The Wall Street Journal reported that in August of 2015, auto loans had, for the first time in history, exceeded $1 trillion. While the amount that the bank risks per transaction is significantly lower than its exposure on a mortgage, insurance claims for damage to automobiles that the institution either owns outright or holds a lien against constitutes a significant opportunity. It makes sense for banks to carefully consider how they handle the auto insurance claims function.
Again, property casualty insurance is regulated at the state level and the various states treat it differently, making it a compliance challenge for many banks. Each state determines how the contracts are established, claim settlement practices and adjuster licensing requirements.
This is an area where loan servicers often experience unnecessary financial losses. They are most often the result of staff that doesn’t have the full knowledge of the auto claims process. Typical oversights include failing to be listed with the insurance company as a loss payee on the policy, not having a set of standard processes that automatically initiate when damage to the asset is reported, and failure to comply with statutory timelines. In addition, the timeline from automobile repossession to sale is significantly shorter than for real estate, so it is even more important that the claim be pursued in a timely manner.
When banks prioritize larger loss transactions, they run the risk of absorbing more of these losses when, with the right staff, they can easily be avoided. For instance, if banks properly manage the GAP claims process with their borrowers, multiple smaller losses can add up to prevent high charge offs. Because this is not generally considered a high priority area by the bank’s risk manager and due to the general lack of internal expertise, many servicers choose to outsource this function.
It is logical for a servicer to engage a third party insurance services partner who specializes in auto insurance claims management. But when this function is sent out to a third party, it is still essential that the work be performed in a fully compliant manner. That means servicers should always work with a specialty insurance vendor who has the processes and infrastructure required to deliver the high level of compliance protection our industry demands.
To learn more about why outsourcing in this area can limit your compliance risk, download our free white paper, Compliance Doesn’t Have to Be a Burden for Servicers When It Comes to Hazard, Flood and Auto Insurance, available on our website.