In the world of auto financing and leasing, failing to enforce auto insurance coverage isn’t just a minor slip-up— it’s a mistake with potentially dire consequences. When a single uninsured vehicle can lead to substantial losses, the traditional manual approach to auto insurance monitoring can leave costly gaps for dealerships and lenders.
Fortunately, new developments in the tech space are making it possible to improve this process. Rather than relying on manual calls and additional interest letters, more and more dealerships are getting real-time information directly from insurance carriers. This emerging strategy helps mitigate risk and streamline workflow for dealerships and auto loan dealers.
What Is Auto Insurance Monitoring?
Insurance monitoring is a crucial process in the world of auto lending that helps protect dealerships and lenders from unexpected losses. It extends the step of insurance verification by tracking the coverage status of vehicles financed through loans or leases throughout the term of the agreement.
Whereas traditional methods rely on additional interest to get notified about policy cancellations, auto insurance monitoring solutions leverage digital processes to provide real-time insights into any changes. This eliminates time delays in receiving cancellation notices, reduces administrative burden, and helps ensure comprehensive protection for the financed asset.
Why Auto Insurance Monitoring Is Becoming Essential
When a borrower leases a car or purchases one with financing, they’re typically required to maintain full coverage auto insurance for the duration of the loan. However, policies can be canceled due to non-payment or other reasons, leaving the vehicle— and the lender’s investment— at risk.
This is where insurance monitoring comes into play. When the lender gets notice that a driver’s policy has lapsed, they can step in by placing collateral protection insurance (CPI) as a backstop.
State of auto lending in 2024
As of 2024, the auto lending market still seems to be stabilizing after COVID-era disruptions. Recent reports state that auto repossessions have increased in recent months, up 23% in the first half of 2024 compared to the same period the previous year. Unsurprisingly, delinquencies have also seen a corresponding increase over the same period. Q1 2024 saw a 30-day delinquency rate of 2.7%, up from 2.3% at the same time last year– a 17% increase.
These statistics may signal increasing financial hardship among consumers, as well as the rise in “underwater” loans as depreciation accelerates. In addition to making lenders more cautious in issuing new loans, these patterns also raise concerns about borrowers’ insurance status.
Many lenders find that missed car payments often correlate with insurance policy cancellations as borrowers try to cut expenses. This leaves lenders open to risk, especially since the cash-strapped driver is unlikely to be able to pay for any uncovered damages they may incur.
In this kind of landscape, it’s especially crucial to get timely updates on your borrower’s insurance status so you can take immediate action in the event of a lapse in coverage.
The risks of lending to uninsured drivers
Picture this: Sarah, a young professional, finances a new SUV through her local credit union. Six months into her loan, she decides to cancel her insurance policy to save money, assuming she’ll be fine for a while. One rainy evening, Sarah loses control of her vehicle and crashes into a guardrail. The SUV is totaled.
When Sarah contacts her lender about the accident, they’re shocked to discover she’s been driving uninsured for months. The credit union is now left with a significant loss on their books. They can’t recover the vehicle’s value through insurance, and Sarah doesn’t have the means to pay off the remaining loan balance.
In this scenario, not only does the financial institution lose the collateral securing the loan, but they’re also exposed to potential liability issues. Moreover, the borrower is left in a precarious financial situation, potentially damaging their credit for years to come.
Why additional interest is on the decline
For many years, additional interest was the best available option for keeping an eye on your customer’s coverage status. However, new industry developments are revealing major weaknesses in this process.
To start, in many states, insurance providers aren’t required to send out additional interest letters until 60 days after the cancellation. In other words, the driver may be on the road uninsured for up to two months before notice is even served. After that, the lender still has to do their part to place backup insurance and bug the borrower to reinstate their coverage.
Additionally, in the current regulatory environment, additional interest letters can pose a compliance risk under the wrong circumstances. Under the new FTC Safeguards Rule, exposing a customer’s personal data can result in a penalty of up to $51,744 per violation. This leads many lenders to opt out of letters in favor of paperless systems.
Finding a Monitoring Solution
Getting the right tool for your insurance monitoring process is crucial to minimizing risk and maximizing internal efficiency. When exploring your options, there are a few key features you’ll want to look out for.
Real-time data retrieval
The biggest thing that sets insurance monitoring apart from traditional processes is how it takes in data. As discussed, previous systems relied on additional interest letters to be processed and mailed out before the lender could get notified about a cancellation. However, new technology makes it possible to send out an automated request to pull current policy information directly from the carrier.
When shopping around for monitoring solutions, ask the tech provider how the data is retrieved, and how current it is by the time you receive it. If there’s a significant delay in updates, the process may not be as streamlined as it claims.
⚠️ Beware of manual insurance tracking services
In your search for an insurance monitoring solution, you may encounter companies that claim to offer real-time monitoring while actually relying on manual processes. Typically, these services work by outsourcing your additional interest handling– forwarding your letters to an off-shore office, sorting through the mail, and inputting the data into a dashboard for you to view. While this may save time for your team, it’s still subject to the same delays as additional interest.
Expertise-backed analysis
A lot of insurance monitoring tech focuses on the data side of the equation– pulling policy information from the carrier and surfacing it to the lender. However, what’s often overlooked is the step of reading through that data and figuring out what it means for your business.
For instance, some solutions will send updated policy information on a periodic basis, which your team then has to review in order to confirm that it continues to meet your requirements. To cut out this additional work, look for a solution that automatically conducts analysis and delivers easy-to-read results.
Built-in risk mitigation
There’s a lot of value in getting visibility into your borrowers’ insurance coverage. However, in the event that there is a policy lapse, just knowing isn’t good enough– you have to do something about it. Fortunately, some monitoring solutions also include built-in features to mitigate risk.
For instance, they may prompt the driver to reinstate their coverage by purchasing embedded insurance and restarting the verification process. That way, the lender doesn’t need to take any additional action– they’ll just place CPI when they find out coverage lapsed and remove it once the new policy is verified.
Start monitoring with CheckMy Driver
In today’s risky auto market, insurance monitoring is more important than ever. CheckMy Driver helps dealerships and auto lenders protect their business with an enhanced monitoring process, including:
✅ Real-time data retrieval through a customer-credentialed system that automatically connects with their insurer to deliver full covered details for in-depth analysis
✅ Expertise-backed analysis with an AI-driven adequacy engine built on decades of industry knowledge
✅ Built-in risk mitigation with affordable embedded insurance options to get your customers and borrowers back on track after a lapse
Want to learn more about how CheckMy Driver can work for your business? Schedule some time with our team!