Magazine article Mortgage Banking

HAZARD INSURANCE OUTSOURCING A Decade of Lessons

Magazine article Mortgage Banking

HAZARD INSURANCE OUTSOURCING A Decade of Lessons

Article excerpt

As pressure to cut costs and boost customer service intensifies, mortgage servicers have turned increasingly to outsourcing.

A solution once plagued by spotty results, a decade of refining these business partnerships has finally proven their worth.

FOR MOST CATEGORIES OF BUSINESS, THE 1990S BECAME THE DECADE

when outsourcing finally emerged as a widely accepted financial and strategic tool. Nowhere was this more evident than in servicing and, in particular, in the insurance servicing of mortgage portfolios.

A renewed acceptance of hazard insurance outsourcing by large lenders began in the early 1990s and continued throughout the decade. As newer outsourcing efforts proved their worth, any stigma from the failed outsourcing programs of the early 1980s was at last removed. Here, finally, was conclusive proof that outsourcing could control servicing costs while retaining or improving servicing standards. As a result, the way was cleared for lenders of all sizes to more confidently consider outsourcing as a viable way to meet their internal and external needs.

This revived interest in insurance outsourcing resulted from the convergence of two major business issues that, in turn, stemmed from economic and competitive forces that continue to affect lenders today. One was the need to provide the highest levels of customer support to obtain and retain customers. The other was the need to increase efficiency and control costs by maximizing resources, reducing overhead where possible and slowing or reducing staff growth.

At first blush, these two issues seem mutually contradictory. How can you improve customer service while limiting or reducing your resources? Fortunately for lenders, two major ways to meet such a challenge emerged in the 1990s.

The first was the incorporation of technological advancements. The strategic use of technology could allow a company to offer better customer service with fewer people. Unfortunately, technology is expensive, and the high cost of keeping ahead of the technology curve remains daunting to many companies. Plus, even with increased technology, significant resources and time are still needed to accomplish the required insurance tasks associated with mortgage servicing.

That is why a second option became so attractive to mortgage lenders: outsourcing. Outsourcing presented a logical alternative to performing all insurance servicing tasks in-house because it could cut expenses, free up resources and allow lenders to concentrate on more profitable core competencies.

As we enter a new decade and look back on the 10-year history of hazard insurance outsourcing by mortgage lenders, this seems an appropriate time to see how it has lived up to its promise. Has it worked? Has it delivered the benefits claimed? Are there really significant cost savings? Can a third party successfully service a lender's customers? How has it affected the lender's operations?

To answer these and other questions, we offer two perspectives: first, that of an outsourcing provider (SAFECO Select Insurance Services) and, second, that of a variety of lenders who have outsourced and that service varying sizes and types of mortgage portfolios (prime and subprime).

The outsourcer's perspective

One of the early lessons learned was that outsourcing wasn't for everyone. Lenders had to be helped to understand whether the benefits of outsourcing were appropriate to the size of their mortgage loan portfolio. From our experience, we found that a lender should be servicing a minimum of 20,000 loans before considering an outsourcing program.

We also found that as outsourcing became more commonplace in the mortgage industry, lenders of all sizes became more receptive to the idea of outsourcing certain aspects of their servicing operation and less concerned about giving up control of these functions to a third party. …

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