Mike's (Mortgage) Minutes: The Hidden Cost In Your Insurance Program

It’s your advisor/broker not knowing what makes your business unique and that advisor/broker not being able to clearly articulate that to the appropriate players in the marketplace.

That’s loaded, but it’s the truth. In a hard market, don’t look for a broker. Look for an advisor who also happens to be a broker. It will save you tons of time and money.

To set the stage, we’re in a hard insurance market meaning that virtually all insurance carriers across the board are asking for more rate/premium. If interested, email me for a recent market update: mrsmith@lockton.com. In the meantime, here’s a quick read from Advisen about the marketplace as of 5/28/2020: https://www.advisen.com/tools/fpnproc/news_detail3.php?list_id=1&email=mrsmith@lockton.com&tpl=news_detail3.tpl&dp=P&ad_scale=1&rid=368551975&adp=P&hkg=vZfo0R2K75

In many industries, not just insurance, a specialist is key when in tough times. Think about it from a medical angle and let’s assume the prices for a surgery were the same. If you need hip surgery, are you going to ask a generalist surgeon down the street or a famous hip surgeon? The value you would get out of the hip surgeon will be far superior, the odds having the surgery done correctly the first time are much higher, and your livelihood long-term is likely to be much better.

Now let’s assume you’re picking a lawyer to defend you. One for $500 per hour and other for $300 per hour. The lawsuit is eventually settled, but which lawyer resulted in the least amount of dollars paid out? Did the $500 per hour lawyer have a much better legal strategy resulting in far less total dollars when factoring in the very low settlement they achieved or did the $300 per hour attorney result in a very high settlement amount with higher total expenses? You get where I’m going here.

The same is true in the insurance business. Side note: I don’t even like the term insurance. I prefer to call it capital, because that’s all it is. We’re trading capital. It’s either your dollars at risk or someone else’s dollars at risk (for a premium).  

So, how much can a bad advisor cost your firm? The answer, particularly in a hard market, is at least 15-20% every year and loss in solid advice relative to your risk exposure.

There’s two key components that lead to high hidden costs: (1) The advisor thoroughly understanding your non-bank business and (2) the advisor knowing the right players in the marketplace.

Thoroughly Understanding Your Non-Bank Business

Because of my focus on lenders, I’ll use the mortgage business as an example. Many banks are also in the mortgage business. Then there are non-bank mortgage lenders that don’t hold deposits, having savings/checking account, etc..

Diving deeper into just the non-bank arena there are retail, wholesale, correspondent lenders. Some lenders have all 3 origination channels, some only have one channel, and others have a combination of them.

Diving even deeper, some of these lenders focus on Non-QM and some don’t. Some have Private Equity backing with their own loan programs. Some have more loan volume for self-employed borrowers than others.

One more step – Some service mortgages and some don’t.

So what’s the point? The exposures and risk for each lender is uniquely different.

However, the “insurance world” puts all these players into one bucket – The Financial Institution bucket.

I see this every week with new prospects simply because the advisor is trying to put a square peg in a round hole – basically forcing the lender to comply with current industry structure rather than finding the right customized solution.

So what’s the difference – The quantified metric is roughly 15-20% just in terms of premium dollars. Getting a claim covered via a customized insurance policy versus a generic FI policy could be a huge bonus.

The truth is that in many situations you’re just another file on an FI underwriter’s desk.

Your profile should be pushed to the right markets, to the right underwriters who know the difference in risk profile between a wholesale channel and a retail channel, and that underwriter should know what the non-bank lending marketplace trends are. From there, the advisor’s conversations negotiate the deal not just exposures on an application that was filled out.

Having a specialist who knows your business will allow them to tell your unique story with underwriters they work with daily. This will directly translate into a competitively priced and comprehensive insurance program that is below where the hard market says you should be.

Knowing The Right Players

Put simply, the insurance industry is structured for their benefit and their efficiencies (like many businesses are). They use the broad term of ‘Financial Institutions’, and most carriers are structured into these FI underwriting groups accordingly. These groups were originally built for the numerous banks and commercial banks – that is what “Financial Institution” means to them. With the rise of non-banks, there has been little to no evolution in the service model.

But if you dive deeper into it, there is a very small niche world of mortgage banking insurance carriers. Without knowing who these players are, your corporate insurance program could be designed incorrectly – you might have coverage you don’t need that you paid for and/or you might be missing the customized coverages a non-bank mortgage lender could obtain through those specialty markets.

Most lenders will get feedback from their advisors where just those FI insurance carries provided feedback and not the mortgage banking focused insurance carriers. These are considered “Bankers Professional Liability”, or BPL, markets.

There are also one or two carriers out there I would call “Miscellaneous Professional Liability” insurance markets that have an appetite for non-bank mortgage banking risk. They don’t have a mortgage banking specific insurance policy form and they don’t have a financial institution insurance policy form. For those reasons, they are more of an “MPL market”.

So, if you’re a lender you essentially have 3 micro insurance marketplaces you should be getting feedback from – The FI market, the MPL market, and the MB (Mortgage Banking) market. By approaching the various carriers in these three buckets, you will guarantee yourself you have the best deal in the market.

Your advisor, their knowledge of your business, and their knowledge of the correct insurance carriers to solicit feedback from will cut all the hidden costs from your program.

Author: Mike Smith

Mike Smith is a Client Advisor at Lockton focusing on complex risk solutions. Management Liability, in the E&O, Cyber, Fidelity Bond, and D&O arena, is his focus for innovative risk-transfer alternatives.