SS&C attended the first virtually-hosted Mortgage Bankers Association CREF/Multifamily Housing Convention & Expo. This year’s attendance required no travel planning and provided commercial mortgage lenders and servicers a great opportunity to network safely and remotely.
During the event, there were multiple insurance and compliance sessions that discussed trends impacting servicers. One common process challenge—effectively managing insurance collection and reviews continues to be top of mind. Just like with residential lending, commercial real estate borrowers are required to obtain insurance coverages for the properties associated with the loan. For commercial properties, coverage amounts are usually required for property, liability, flood, business income, and can even be required at the building level for things like earth movement. Borrowers obtain insurance from insurance agents; the loan servicers request the policy information and proof of payment from the agents, and the insurance analysts” compare the provided evidence, loan contract, and investor requirements to determine overall compliance and financial risk.
The general consensus of panelists and attendees is that only 10% of the policies are found to be in compliance the first time. Any non-compliant items—such as inadequate coverage amounts—require coordination across the agent, borrower, and sometimes investor to either increase to the required minimum or agree to a waiver. Then the process starts all over again 12 months later.
The panelists and conference attendees also highlighted some key trends that have emerged since the pandemic:
- It is harder for borrowers to obtain the minimum coverage amounts—particularly for umbrella coverage for senior housing properties.
- Borrowers are requesting to pay premiums monthly instead of annually (finance). This means that the borrower is required to provide evidence of paid insurance on a monthly basis, which increases the workload for both servicers and the borrowers.
- The use of re-insurers and self-insurance is increasing.
From a technology perspective, the panelists also outlined key areas where technology could be used to help improve the process—making it faster, more consistent and more customer-centric.
- Data Digitization—ability to extract variable data from the comments section on the ACORD form and map it into a pre-formatted data structure.
- Rules—inventory of rules maintained for all regulatory, investor and servicer-defined requirements.
- AI—the ability to compare the new insurance data against the minimum standards and any requirements, and automatically identify non-compliant items.
Insurance compliance reviews are not for the faint of heart—they are complex with financial risk. If something is missed and there is a catastrophic event—hurricane, fire or a pandemic—significant financial risk will be introduced. Combining talented staff with flexible technologies to reduce risk and remediate the current pain points is the path forward to reimagining the insurance and compliance processes for commercial real estate loan servicers.
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