Q&A: How Banks Are Adapting to Heightened Insurance Tracking Demands

As insurance becomes more expensive and harder to secure, the importance of robust insurance tracking has never been greater. Banks face the growing risk that borrowers might let their policies lapse, leaving valuable collateral exposed and increasing the potential for uninsured losses. This heightened risk, coupled with escalating regulatory demands, is putting pressure on banks to ensure their insurance tracking processes are both thorough and up to date. To explore how banks are navigating these challenges, we spoke with William Del Biaggio, president of QuieTrack—a provider of insurance tracking solutions. 

As the financial services industry continues to evolve, how are trends in insurance tracking diverging between large and smaller banks? 

Historically, smaller community banks have kept insurance tracking in-house, where dedicated loan servicing employees handle the task. However, these employees often take on many different responsibilities as banks try to operate more efficiently and leaner in today’s economic environment. Insurance is often deprioritized with the many other responsibilities and that leads to increased compliance and uninsured collateral risks. Larger community and regional banks tend to use third-party partners to ease the burden on their teams. Recently, we’ve seen more smaller banks outsourcing insurance tracking due to staffing challenges and the rising risk that a property they are lending to might be uninsured, particularly in California, New York, and Florida. Failure to prioritize this aspect of risk management can result in increased exposure to uninsured losses, regulatory non-compliance, and reputational damage. 

What are some of the most significant challenges banks face when it comes to effectively tracking insurance across various types of loans and collateral? 

One of the biggest is that bank employees who review insurance policies are experts in finance, but not in insurance. This complexity puts significant pressure on them to ensure policies meet internal guidelines. With rising policy cancellations, non-renewals, and mid-term changes, the workload has increased dramatically. Banks can address these challenges by creating clear insurance requirement guidelines, requiring insurance policy training, and ensuring alignment across loan officers, servicing, and compliance teams. Misalignment often results in delays, borrower frustration, and ineffective risk management. Streamlining communication and processes is key to reducing these risks.  

So, banks need to not only make sure a borrower has insurance, but they also need to make sure they have the right insurance? 

Exactly.  Just because a borrower has insurance does not mean the collateral is properly covered. For instance, most banks have requirements like a minimum coverage amount, maximum deductible amount, and ensuring it is the right policy for the type of collateral. 

Say a borrower has insufficient coverage—their home is worth $1 million, but they only have $500,000 in insurance—which is becoming more common. In the event of a total loss, they would not have enough coverage to rebuild their home. So, they would just leave the collateral with the bank and default on the loan, leading to a loss.  Why would a borrower ever underinsure? Well, they are trying to do everything they can to keep their insurance premiums as low as possible because nationwide, they have increased by more than 20% since 2021 with certain states experiencing even more acute increases. 

Likewise, if a borrower has too high of a deductible, it can also lead to the borrower defaulting. Some borrowers can have a deductible of $25,000, $50,000, or even $100,000, with the same rationale as above—to lower their premium costs. But in the event of a loss, they may not be able to make the deductible payment, leading to default. This would then mean the bank is stuck with paying that deductible to get the coverage. 

Finally, banks need to ensure they have the right insurance policy given the collateral type.  The most common example we see is, if a house is under any construction or renovation, a standard homeowners policy will not cover that property in any loss event. The borrower needs to specifically get a builder’s risk or course of construction policy to protect the collateral.   

Banks often have these internal requirements, but they can be very tricky for loan servicing employees to keep track of—again they are finance and lending experts, but not insurance experts. Insurance is not easy! Sometimes banks are unaware of the importance of these points and they can have insurance exposure they are not aware of. 

With the increasing reliance on technology in the banking sector, how do you see the role of advanced insurance tracking solutions evolving? 

The future of insurance tracking is fully electronic, with real-time policy data sent directly to banks or third-party insurance tracking companies. Today, much of the work involves manual tasks like contacting agents and receiving physical mail. Automation will eliminate these steps, with insurance companies delivering real-time policy data directly to banks. Currently, this automated data accounts for about 50% of a bank’s portfolio, according to our internal statistics, and is sent to third-party insurance tracking companies only, but adoption is growing. To benefit from these innovations, banks need systems that can import electronic data or partner with an insurance tracker that has these integrations in place. 

How do regulatory changes and increasing scrutiny impact the importance of accurate insurance tracking? 

Regulatory changes, such as the evolving requirements of the Consumer Financial Protection Bureau (CFPB), Flood Disaster Protection Act (FDPA), and state-specific mandates, have increased the stakes for accurate insurance tracking. Non-compliance can lead to fines, penalties, and reputational damage. There have been over $400 million dollars in fines assessed to banks in the last few years for violations of force-placed insurance regulation (see here, here, and here for examples). In December 2023, the director of the CFPB spoke about how they are carefully monitoring force-placed insurance. As regulators focus more on risk management practices, banks that maintain precise and up-to-date insurance tracking are better positioned to avoid scrutiny. Staying compliant in this dynamic environment requires robust tracking processes that can adapt to new regulations quickly and efficiently—whether in-house or through a specialized third-party partner. 

What exactly are the regulatory requirements around insurance tracking?  

The CFPB focuses on ensuring fairness when placing force-placed insurance on a borrower—proper notices, advanced warning, and clear communication to the borrower about costs and coverage.   

For flood insurance, the Flood Disaster Protection Act (FDPA) is more focused on the actual insurance tracking side to ensure the bank has flood insurance coverage at all times and the proper coverage, deductibles, and endorsements in place. 

The OCC and FDIC ensure the banks are complying with both the CFPB’s 1024.37 force-placed insurance regulation and the FDPA—as well as ensuring banks are holding to their own internal compliance standards, as all banks will have insurance requirements.  

Additionally, GSEs like the SBA, Fannie Mae, and Freddie Mac all have insurance requirements as well that lenders must maintain if they are selling loans to Fannie or Freddie or originating or servicing SBA loans. These agencies ensure insurance coverage is in place and has acceptable coverage amounts, deductibles, and insurance company ratings, and they make sure the lender is listed as mortgagee, as some general requirements. 

In the major fines that we have seen in 2024, the focus is on lenders “falsely placing” force-placed insurance on their loans—meaning the borrowers had insurance, but insurance tracking efforts were not able to [recognize] the borrower’s policy and [banks] charged the borrower. So, it is a combination of poor insurance tracking and high premiums being assessed to borrowers when they really should not have been fined. 

What kind of problems can inaccurate and out-of-date records create? 

Inaccurate and out-of-date records can lead to external audit findings by the OCC and FDIC. They can also lead to collateral insurance risks—if you do not have a borrower’s insurance policy on file or have inaccurately accepted an insurance policy, you may not have coverage in the event of a loss. Suppose a house burns down, and the borrower did not have sufficient insurance. The borrower then defaults on their mortgage leading to the bank suffering a severe loss as the collateral value could now be zero. 

The second point is much more acute now as many borrowers are being non-renewed or canceled from their existing insurance carriers. So, there is a much higher risk of borrowers not having insurance or insufficient insurance than ever before.