Which risk management program is right for your loan portfolio?

Across the board, the largest asset a financial institution has is its loan portfolio. But each financial institution is unique regarding its business goals and borrower demographics; therefore, finding the right loan risk management program can be elusive. Financial institutions should carefully evaluate their current and future exposures to risk, internal systems and resources, and legal considerations when choosing the right one.

In this blog, we’ll explore three different types of risk management programs: self-insuring, blanket coverage, and lender-placed insurance.

Self-Insurance: Relying on Borrowers to Cover Losses

Financial institutions that opt for self-insurance choose to absorb the cost of physical damage or theft losses resulting from uninsured collateral in their loan portfolio. Under this type of protection strategy, financial institutions are not able to track whether borrowers maintain the insurance required by most loan security agreements.

Self-insuring may be the appropriate choice for financial institutions if the ultimate cost related to self-insurance can be absorbed without substantial changes in the overall quality of loans or interest rates and fees. But when losses and operating expenses begin to creep upward, financial institutions are left searching for additional revenue sources to offset those costs—or select an alternative loan risk management approach.

 

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