4 Key Considerations for Financial Institutions Facing a Surge in Lender-Placed Insurance
Higher interest rates and a tough insurance market have translated into financial institutions issuing more lender-placed insurance. But some lenders might not be prepared for the growth. Here’s what you need to know to protect your real estate portfolios.
Over the past decade, lender-placed insurance programs have usually been an afterthought for financial institutions: Delinquency rates on real estate loans were at historic lows 1 and borrowers could easily obtain affordable insurance coverage to satisfy real estate loan terms.
Lender-placed insurance protects lenders if a borrower fails to obtain sufficient coverage under their loan agreement. Most financial institutions haven’t had to issue lender-placed insurance to protect their asset portfolios because there hasn’t been a widespread need.
Interest rate hikes and tighter credit conditions are increasing loan costs, which has resulted in rising delinquencies.2 And rising delinquencies suggest financial institutions are issuing more lender-placed insurance.
A difficult insurance market also means more lender-placed insurance
Due to several factors, insurance rates have been rising the past few years, and in some cases, those increases have been dramatic. As a result, borrowers may cut back on insurance or delay paying premiums in order to cut costs.
What’s more, there have been insurers abandoning some markets en masse, citing their inability to stay profitable in the face of increased catastrophes. That often leaves real estate owners unable to secure coverage at an affordable rate.
In these cases, lenders and servicers have no choice but to apply lender-placed insurance on borrowers.
Lender-placed insurance program considerations
Lender-placed insurance programs help protect financial institutions from otherwise uninsured collateral losses and comply with secondary market requirements.
Here are four characteristics of a strong lender-placed insurance program:
- Adequate policy limits and deductibles. Policy limits should be sufficient to cover most collateral. For example, $1 million in per property limits that were secured for a program three years ago may no longer be enough for current property values and rebuilding costs. In addition, lender-placed insurance programs need adequate deductibles that meet requirements of secondary markets like Fannie Mae and Freddie Mac.
- Monoline coverage capabilities. It’s important for a lender-placed insurance program to place a single coverage line, such as wind, fire or earthquake, if a borrower is unable to find that specific coverage elsewhere. The alternative to monoline placement could create situations in which wider-ranging lender-placed fire and extended coverage would have to cover a single peril, such as wind.
- The right operational systems. Lenders and servicers need operational systems sufficient to manage the collateral verification process. For instance, financial institutions must notify borrowers when lender-placed insurance is in effect and issue certificates of insurance to other relevant entities. Superior lender-placed insurance programs have technology and processes to deliver on these mandates.
- Matched risk profile and risk management processes. The lender-placed insurance program should be part of a financial institution’s overall collateral risk management process. Lenders can work with insurance brokers to develop a lender-placed insurance program that matches their risk profile.
Contact HUB International’s financial institutions insurance team for more information on securing the best lender-placed insurance program to protect your real estate portfolio.
1 National Mortgage Professional, “Overall Mortgage Delinquency Rate Hit All-Time Low In March,” May 25, 2023.
2 CNN, “Commercial and multifamily mortgage delinquencies rose in the first part of 2023,” June 2, 2023.