Title: State of the Payment Protection Industry
1State of the Payment Protection Industry
Presented by Gary Fagg, CreditRe
2Small Variations Can Make a Big Difference
- 98.5 of our DNA is identical to chimps DNA
- Only 1.5 is the difference between being able to
solve complex lending formulas and sitting in a
tree throwing poop at passersby - But Im not sure the difference is that much
- Its an election year, and we have poop flying
everywhere
3And further EvidenceAd for Macys DPP Program
4Back to Our Credit Protection World
- There really is very little variation in the
protection available under - Debt protection products (exempt lenders)
- Debt waiver products (lenders with no automatic
exemption from insurance regulation) - Credit insurance (where it all began)
- But the regulatory differences are dramatic
5Available July 31
6What Caused the Drop
- 40 replacement with DPP
- 20 regulatory mandated elimination of single
premium products on real estate secured loans
change was too hard, some just gave up - 40 at dealerships, total replacement with more
profitable protection products (VSC, GAP) and
refund lawsuits
7Bank Installment Consumer LoansCredit-Related
Insurance
- Single premium still visible but many banks are
not making consumer loans - No compelling reason to change
8Bank Installment Home Equity LoansCredit-Related
Insurance
- Monthly premium credit-related insurance is a
modest success - Lack of uniformity among states, loan types
- No involuntary unemployment option
- Attrition rates of 3 - 5 per month
- Consumer advocates unimpressed
9Bank Installment Home Equity LoansCredit-Related
Insurance
10- Have debt protection products fulfilled their
promise?
11The Most Frequently Asked Question Regarding Debt
Protection Products
- How much of this stuff will we write in 2008?
- Guess
12A Bigger Pie?Looks the Same so Far
13General Purpose Credit CardsFulfilled Promises
- 2.7 billion-plus of annual DPP retail fees
- Complete conversion by major credit card issuers
to debt protection products - All new solicitations in 2008 are debt protection
products - Addition of all-cause death benefit to many
programs - OCC is allowing this market to evolve
14General Purpose Credit CardsGrowth of
Premium/Fee Income
- 1.5 Billion of CRI in 2000 3.1 Billion of DPP
and CRI in 2008 - Growth in credit card outstandings2000 to
2008 50 - Growth in fee rate 2000 - 0.55/100/month 2008
- 0.90/100/month 63 - Continued investment in marketing and improved
acceptance rates
15General Purpose Credit Cards DPPThe All
(Economic) Weather Product
- So many events are covered that the cost of
various protections are balancedone goes down
when another one goes up - Housing recessioncost of move to new residence
protection is down when involuntary unemployment
protection is up - Epidemic, pandemicbring it on
- DPP has sales appeal in good times and bad with
a slight modification in the sales pitch
16Evolution of Retail Card Sector
- Prior to 2000, the market was retailer charge
card - (1985) began with Assurant Accountgard
- 1.50/100/month for 90-day O/B for death,
disability, and involuntary unemployment - (1995) 1.80/100/month by adding 90-day O/B for
unpaid family leave protection
17Retailer Revolving Charge CardsThey Went Away
- Target, Sears, Dillards and Federated converted
and had strong DPP programs - Transitioned from charge cards to general purpose
credit cards - Most portfolios have been sold to the major card
issuers only Target left as stand-alone program - Many private label retailer programs are marketed
and are doing great
18Business CardsSlowly Growing
- Marketplace split among no protection product,
credit-related insurance, and DPP - Advanta, American Express, Capital One, Wells
Fargo business cards have DPP option - Have added business interruption protection
- Pretty quiet year in this sector
19Lines/HELOCsWe Are Getting There
- Clearly the path lending is following at banks
- Credit-related insurance regulations did not
allow product features to limit adverse selection - Adverse selection still a product design concern,
but DPP offers a second chance at this market - Do not get in the middle when the debate takes
place on whether to freeze the card during
benefit activation
20Home Equity Loans (HELOAN)Slowly, DPP Is
Spreading
- Primary holdup was lack of bank systems support
for rate quoting, document production, and fee
reporting - The needed systems are here, mostly
- Steady but not spectacular growth in 2008 and
beyond - Still have system challenges from open-end
installment loans - Loss experience is quite favorable
21First Mortgage LoansPoised but Not There Yet
- Fannie Mae opened the door by delegating DPP
program approval to field representatives, but
has not signaled any enthusiasm - Freddie Mac has indicated a willingness to follow
- Other secondary markets are being educated
- We will get there, I think, but only Bank of
America is clearly there
22Coming Innovations and Introductions
- First Farm Credit Association DPP program is
slated for introduction in 2008 - Small business installment loan DPP programs are
under development - Both share the challenge of applying DPP to large
loan amounts, to a protected population that is
older and mostly male, and a desire for all-cause
death protection
23Vehicle Lending Marketplace
- Stability has finally been achieved in GAP for
dealer CLIP premiums - FI office is looking for that next hot product
- WalkawayTM protectionturn in your car keys and
walk away from your loan, under certain
conditions - Lifetime powertrain warranties for new vehicle
buyer - Lifetime tire protection for life of new vehicle
buyer
24Direct Vehicle LoansIts All at the Credit Unions
- A shrinking portion of bank lending
- Credit unions now command about 20 of vehicle
lending - GAP and DPP programs are a good fit with bank and
credit union cultures
25Vehicle Lending MarketplaceComing Together at
the FI Office
- 50-year trend in movement of vehicle lending from
financial institutions to dealer FI office - Zero-percent financing by manufacturers
financing arms almost killed vehicle lending at
banks - Credit-related insurance has fallen off the
table exits by JMIC, UUL, and AIG/AGAC over
refund lawsuits
26Indirect Lending DPP The Regulatory Gap Has Been
Breached
- Desire is to port the bank exemption into the FI
office loan process - OCC Interpretative Letters 1093 and 1095 in March
2008 provide the path for a dealer to offer any
bank DPP - It will be rough starting, but uniform product
will arrive and eventually mimic the current GAP
waiver structure
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28If you build it, they will come.