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Closed-end MOB Premium Calculations & Considerations

Closed-end MOB Premium Calculations & Considerations. The impact of Predatory Lending Legislation:. Single Premium computations expressly prohibited for loans secured by real estate.

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Closed-end MOB Premium Calculations & Considerations

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  1. Closed-end MOB Premium Calculations & Considerations CCIA 51st Annual Conference

  2. The impact of Predatory Lending Legislation: • Single Premium computations expressly prohibited for loans secured by real estate. • Amendments to HOEPA do not expressly prohibit single premium but effectively prohibit its use by including single premium amounts in the trigger amounts for high cost mortgage loans. • No end in sight for Predatory Lending legislation. • Prohibition of Single Premium on real estate transactions gives carriers a reason to evaluate overall policies and objectives. CCIA 51st Annual Conference

  3. Why is “MOB” touted as a better alternative for consumers? • Premium amounts will be lower with MOB than with Single Premium for corresponding transactions. • Total interest charges will be substantially lower than when premiums are financed and interest accrues on the premium amount for the life of the transaction. • The “pay as you go” concept is viewed as more equitable and consumers can easily cancel the insurance coverage at any time. Valid Assumptions and Premises??? CCIA 51st Annual Conference

  4. Rules for Traditional “MOB” Premium Calculations • The Declining Insurance Base is the Outstanding Principal Balance. • Insurance premium is treated as an “other charge”. It is neither Amount Financed nor Finance Charge. • The premium is assumed to be earned, assessed, collected, and remitted at the end of each computational period. • The premium is not financed. CCIA 51st Annual Conference

  5. Rules for Traditional“MOB”Premium Calculations (cont.) • The premium is not insured. • The interest is not insured. • The allocation of payment is first to accrued insurance premium(s), then to interest, and finally to outstanding principal. The premium is earned on a periodic basis but is never added to the outstanding principal balance. CCIA 51st Annual Conference

  6. Illustration of Traditional MOB Premium$10,000 Amt. Financed, 12 Monthly Payments, 12% Simple Interest$1.00 per month per $1000, Level Payment - $894.11

  7. How does MOB compare with single premium net payoff coverage for the same transaction data? •Results dependent on term of the transaction. • Minimal difference in premium and interest charges for short-term transactions. • Be sure to compare “apples and apples”. • Single Premium is using $.65/$100/yr which translates to $1.00 per $1000 per month at 12 months. The effective monthly rate (EMR) will increase as the term increases. EMR @ 12 months is $1.00 per $1000 per month EMR @ 60 months is $1.06557 per $1000 per month EMR @ 180 months is $1.07734 per $1000 per month CCIA 51st Annual Conference

  8. Illustration of Traditional Net Payoff Single Premium$10,000 loan amount, $10066.23 amount financed, 12 Monthly Payments12% Simple Interest, $ .65/$100 per year, Level Payment - $894.90

  9. MOB / Single Premium Comparison INDIANA Prima Facie Rates $.65/$100/yr and $1.00/$1000/mo

  10. Single Premium/MOB Comparison OHIO Prima Facie Rates $.769/$1000/mo

  11. Single Premium MOB Premium No Insurance

  12. Monthly Outstanding Balance A&H (Disability) coverage • Premium Computation concept is the same as MOB life coverage; what is different is the base of coverage. •  Allocation rules are (1) accrued life, (2) accrued A&H, (3) accrued interest, (4) outstanding principal balance. • Coverage can be either of (but not necessarily limited to): • Based on cash amount (same as life) • Based on payments outstanding • If A&H coverage is based on payments outstanding: • A&H premium is insured •  Interest is insured CCIA 51st Annual Conference

  13. Monthly Outstanding Balance A&H (Disability) coverageBased on Cash

  14. Monthly Outstanding Balance A&H (Disability) coverageBased on Payment Outstanding

  15. Monthly Outstanding Balance A&H (Disability) coverage • Closed-end often uses a schedule of A&H rates per $100 of coverage and the rate is converted to an actuarial equivalent monthly rate per $1000 of coverage. • Some Credit Insurance Regulations will publish an underlying rate per $1000 per month. CCIA 51st Annual Conference

  16. MOB Premium Calculation Considerations 1) Traditional MOB Calculations Constant Total Payment Variable P&I Payment Variable Insurance Months 1 $891.11 = $10.00 + $884.11 2 $891.11 = $ 9.22 + $884.89 Consumer Payment – ConstantInsurance Payment – VariableP&I Payment - Variable CCIA 51st Annual Conference

  17. MOB Premium Calculation Considerations 2) Level Monthly Insurance Constant Total Payment Constant P&I Payment Constant Insurance Months 1 $894.20 = $ 5.71 + $888.49 2 $894.20 = $ 5.71 + $888.49 Consumer Payment – ConstantInsurance Payment – ConstantP&I Payment - Constant CIA Spring Conference

  18. MOB Premium Calculation Considerations 3) Variable Insurance / Level P&I Payment Variable Total Payment Constant P&I Payment Variable Insurance Months 1 $894.49 = $10.00 + $888.49 2 $897.70 = $ 9.21 + $888.49 Consumer Payment – VariableInsurance Payment – VariableP&I Payment - Constant CCIA 51st Annual Conference

  19. Types of MOB Life Premium Calculations 4) Truncated Coverage Options • Payment during Insurance Term includes Principal, Interest, and Insurance. • Payment after Insurance Term includes Principal and Interest only.  A) $1,065.00 payment during first 60 months w/insurance B) $1,003.60 payment for remaining 60 months of transaction $70,000 Loan 12% Simple Interest 120 Month Loan Term / 60 Month Insurance Term CCIA 51st Annual Conference

  20. Types of MOB Life Premium Calculations 5) End of Month Insurance Posting (Hybrid Approach) • Premium is posted at the end of each monthly period regardless of when scheduled payment is due. • Monthly Premium amount earns interest between EOM and payment due date. • NOT single premium but violates interest earning assumption of traditional MOB calculation. CCIA 51st Annual Conference

  21. Hybrid – Premium Posted at EOM CIA Spring Conference

  22. Issues for Discussion with MOB Calculations • Negligible principal reduction with long term transactions and traditional MOB Life calculations. CCIA 51st Annual Conference

  23. Negligible Principal Reduction on Long Term Real Estate Transactions

  24. Issues for Discussion with MOB Calculations • Ascending Effective Rate of Return with Level Monthly Premium Method CIA Spring Conference

  25. MOB Transaction -Variable Premium Constant- EMR

  26. MOB Transaction - Level Premium - Ascending EMR

  27. Other Issues Associated with switching to MOB Insurance • Creditor needs to re-tool and retrofit existing processing system. •  Have enough “buckets” to handle a variable/level “other charge”. • The status of “coverage” if a payment(s) is missed, especially with A&H. • What to do with quoted payment if insurance is cancelled by consumer. • Coupon books vs. monthly statements. CCIA 51st Annual Conference

  28. Other Issues Associated with switching to MOB Insurance (cont.) • Loss of investment income. • Does creditor/producer remit on accrued or collected premiums? • Future operations will need to accommodate a “dual policy” of processing MOB transactions and still refunding existing single premium transactions. CCIA 51st Annual Conference

  29. Options and Issues to think about • Creditor should view move to MOB coverage in the same light as moving financing transaction from pre-computed to interest bearing (simple interest). • Treat accrued premiums like interest. • Establish a daily factor for life and A&H accrual. • “Missed” payments not a continual question of coverage issue, they continue to accrue an insurance charge. • Quantify savings realized from not having to perform future refund operations and balance that against lost income estimates. CCIA 51st Annual Conference

  30. Is MOB always a benefit to consumers???? • Premium charge difference is minimal on non-real estate “average” consumer transaction. •  How to value the “benefit” when the principal balance does not decrease during the insurance term during real estate transactions? • How does early payoff affect the relationship between MOB and single premium. CCIA 51st Annual Conference

  31. How does early payoff affect the relationship between single premium and MOB premium calculations? $10,000 Cash Amount12% simple interest60 paymentsSingle Premium Net Payoff - $.65/$100/yr = $1.06557 per $1000 per monthMOB Premium = $1.00 per $1000 per month As of Payment No.Earned Single PremiumEarned MOB Premium12 $123.36 $111.86  30 $266.75 $242.71 54 $364.77 $333.14 CIA Spring Conference

  32. What about states where MOB premiums will be greater than single premium net payoff coverage? CIA Spring Conference

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