The mortgage industry is flourishing. Low interest rates and migration out of population centers mean more people are looking for homes, which means more people are looking for mortgage loans. However, with increased business comes increased exposure. While record lending may fuel growth, it also adds risk.
Growing Risks and Exposures
The mortgage industry faces many different types of risks. Whether a business is a lender or a loan originator, there is exposure. The pandemic has caused shutdowns, forcing many businesses to close; some permanently. This has resulted in layoffs and job losses. The employment rate, which was recently at an all-time low, is now more than double what it was before the pandemic.
When borrowers lose their jobs there is an increased chance of a loan default. Unemployment, underemployment, and a struggling economy can be tell-tale signs that the housing market is going to suffer, if not now soon. And, as a rule of thumb when the housing market struggles, the mortgage industry suffers as well.
In some cases, a loan originator that sold the loan may be required to buy the loan back or refund commissions. These losses go directly to the business’ bottom line and are in addition to more traditional risks, such as E&O, legal liability, employee-related claims, and reputational risk that any business may face.
A business may be able to insure against some of these risks. However, not every risk can be covered commercially, and some insurance coverages may be prohibitively expensive. Fortunately, there is a solution when the commercial market will not do. And that is a captive insurance company.
A captive is an insurance company formed by a business to cover the risks and exposures of the business. It enables a business to buy insurance that is tailored to the specific needs of the business.
Coverage Possibilities
RMC has worked with the mortgage industry for many years. We have helped mortgage companies form and manage very successful captive insurance companies. Some of the risks that a captive can cover are:
- Administrative Actions – fines and penalties by governing bodies
- Collections Risk / Clawbacks – based on EPO’s and EPD’s
- Directors & Officers – exposures for the officers of the company
- Deductible Reimbursement – reimburse deducible layers of commercial insurance risk
- Cyber – broad coverage
- Loss of Key Contract – losses of revenue because of a lost contract (think Fannie/Freddie Mac)
- Medical Buydown – layer of employee medical insurance should the company meet the requirements
- Regulatory Change – operational or revenue losses based on regulatory changes
- Reputational Risk – covers revenue lost due to a reputational exposure
Mixing Commercial Risk into a Captive
A captive insurance company can cover many types of standard commercial risks. Some risks can be fully covered by the captive, instead of through the traditional commercial market. Other risks may be better handled by a combination of a captive and a commercial insurer.
E&O, Fidelity Bonds, Professional Liability, Workers Compensation, General Liability, and Property can all be written by the captive or by a combination of a captive and commercial insurer. In some cases, it may make sense to use a fronting carrier where an admitted company is required. In other cases where an admitted carrier is required, a business can reduce premiums by increasing its deductible, and the captive can write a deductible reimbursement policy.
Taking on the Risk of Your Health Insurance
A mortgage company, like any business, has employees. And, like any business, health care is a major expense. Most businesses are unaware that a captive can help them reduce their healthcare costs. By using its captive to assume some of its healthcare risks, a business can significantly reduce its overall spending while still providing its employees with first-class healthcare.
To discuss your options and to see if a captive insurance company is right for your business, contact RMC today at rmc@rmcgp.com or 239-298-8210.
