A new product from Bankers Insurance Services and Insurmark is making it less complicated for financial institutions that own or service mortgage loan portfolios by combining the necessary coverages into one policy.
The two companies, which are part of the Aon Corp., have introduced a new product called Global Portfolio Protection Program, or GP3. The product combines options from both companies to offer mortgage impairment coverage, property and liability insurance for forced placed and foreclosure properties, mortgage errors and omissions coverage, and flood insurance.
“Think about a loan portfolio, it needs to be covered from a global perspective,” says Tom Delaney, managing director of Bankers insurance Services.
Delaney says the coverages were always offered by the two companies but the timing was right to package them together for financial institutions.
“The industry really needs something like this because there is so much activity in the force-placed REO (real estate owned) marketplace. They are dealing with numbers they haven’t in the past,” says Delaney. “People are defaulting and not renewing insurance in record numbers and, if I’m a bank, I want the best protection for banks I can get.”
The recent floods nationwide have reinforced the need for mortgage impairment insurance, which has first and third party components. It serves as an E&O policy for the bank in the event that there is uninsured property damage to the collateral property backing a loan. First-party mortgage impairment covers the bank if an uninsured event, such as a flood or earthquake, occurs and destroys the property.
“If [the bank] hasn’t sold that loan they could have a first party loss for whatever the loan amount was,” says Delaney. “The bank can’t foreclose because the property is gone so it’s a first party exposure if the property is damaged by a peril that the property was not insured against.”
Delaney says this in particular applies in California where buyers are not required to purchase earthquake insurance and in flood zones where the water has never gone before.
“All these banks and borrowers that are buying properties are sitting on an exposure in the event an uninsured event happens and the loans are not performing,” he says.
Neil Tatarelis, underwriter with Bankers Insurance Services, says with the record high number of foreclosures, there are many issues for financial institutions to deal with and insuring these properties is just one of them. Forced-placed insurance has become has been important recently as borrowers stop making payments on their home.
“If you are defaulting on a loan you are most likely not paying insurance,” says Tatarelis. “As long as you have loans you are going to have an exposure to people who can’t pay for their property.”
The coverage from the two companies also protects against damage to the home and vandalism, which can also be common with foreclosed homes.
“There is a lot of foreclosed property and a lot of opportunity to miss putting insurance in place,” says Delaney. “There is a higher hazard out there because of the job market and economy in general but specifically the housing market.”
Tatarelis says they are currently focused on educating agents and their clients about how these coverages work and why they need a program like this.
“Mortgage impairment is a fairly tricky coverage to wrap your head around, so adding that in with REO – there is going to be a learning curve with clients and brokers,” he said. “It is going to take some training on how the coverage works and how they go hand in hand. They are a couple tricky coverages to teach brokers about.”
The two companies say they have already seen a lot of interest in the product, but that doesn’t mean they will be taking any and all business that comes their way. Delaney says they would like to start with banks that have stronger portfolios, such as community banks and credit unions.
He says the challenge with starting up a new program like this is making sure to get it going with sound risks.
“These days there is so much non-performance out there and there are so many opportunities out there and we are here for them, but if we really have our choice we would have some insulation with the smaller community bank types.”
The coverage is written with Lloyd’s of London and limits in-house are available up to $25 million, but can go beyond that in the open market.
The rate for force placed and REO accounts is agreed up on at the underwriting stage and a premium isn’t charged until the bank reports its properties to the insurance company, which occurs on a monthly basis.
For mortgage impairment, a premium is charged on the entire portfolio based on the geographical nature of the portfolio, its size, and other factors.
Delaney says this product is a good way for brokers and agents to enhance their client relationships because they can place these three coverages with one carrier, rather than working with three different ones, which can be a liability if a claim occurs.
“If you are an independent agent and you are placing the insurance for a local bank and you have these three product lines spread out among various carriers, you have a pretty good opportunity for unhappy insureds in this environment,” he said.