Mitigating Risk with Insurance

By Pam Easley05.09.2016

Risk is an important concept to credit unions, especially striking the right balance between high-risk high return and low-risk, low-return assets. Credit unions frequently decide to diversify their loan portfolios by adding commercial real estate loans, as one method to manage their risk. Since these loans and properties play a major role in a credit union’s loan portfolio, having the right insurance, both borrower-placed and lender-placed, is important to managing the potential for loss on these valuable investments.

Borrower-Placed Insurance

To protect your credit union’s valuable CRE portfolio, borrowers are required to place appropriate insurance policies on these investments. Naturally, the type of insurance policy and the amount of coverage depends on the property type, worth and location. Commercial property insurance is required by law, and credit unions that engage in member business lending should be aware of the legal requirements and ensure that their borrowers have the right coverage to safeguard their loan portfolio.

Lender-Placed Insurance

While the primary responsibility for insurance falls on the credit union’s loan recipients, credit unions should also take advantage of lender-placed insurance in order to have complete protection of these valuable assets. Lender-placed insurance serves as an additional safety net for instances in which a borrower’s insurance policy fails to cover all damages in the event of a disaster. Occasionally, a borrower might fail to renew an insurance policy on time, or the borrower’s coverage is insufficient, so having this additional coverage protects your credit union from writing off the assets purchased or built with their CRE loans.

Deciding on Coverage          

Deciding which insurance policy is right for your credit union involves many different factors, such as location and property type. For example, condo units in certain coastal areas are legally required to be insured for flood and windstorm (hurricane) protection. Occasionally, if there are unusual risks to a property’s area, a difference in conditions policy would help offset costs associated with a loss that is greater than that covered by a standard insurance policy. Ultimately, when considering multiple insurance options, it’s important to keep in mind the property type, its intended use and any factors related to its location that might end up causing costly damages.

Commercial real estate loans are an ideal choice to help diversify your credit union’s portfolio risk. Insuring those investments should be a high priority for your borrowers, but also for your credit union. The right insurance coverage helps mitigate risk to your assets in your portfolio, so you only have to worry about selecting the right CRE loans. There are a range of insurance options, and selecting the right partner to protect you when your assets are at risk is crucial to maintaining the financial health of your credit union for years to come.

Pam Easley is the CEO of Extensia Financial, LLC. Extensia provides insurance and loan review services as well as general consulting services for financial institutions and other lenders. Contact Extensia at (800) 894-8328.

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