Growing up, I remember a car dealership in my area that held a charity golf tournament. They had a promo where if anyone scored a true hole in one, they’d win a brand new Dodge Ram 1500.
“Brilliant!” I thought as I teed up every hole, confident that this hole would be my first hole in one (I don’t even want to mention how bad my handicap is, but let’s just say I prefer drinking in the woods to breaking par).
The eleventh hole was a par 3 with a wide green. It broke right with a bit of a hill to the left of the pin. So I teed up my ball on a short tee, pulled out my 9-iron and felt that perfect “clap” on the club face.
The ball had some legs and great direction. It flew about 60 yards in the air and landed pin-high on the green, just up the small grade from the pin. My foursome and I had our clubs raised in the air, eyebrows wide, shouting as the ball landed right where I wanted it. My first hole in one.
But the ball, in fact, didn’t roll at all. Instead, it left about a three-inch divot right where it landed. The green was wet, we were four beers deep, and I had a cratered ball and a handicap that wasn’t moving. That Dodge Ram was someone else’s for the taking. Who could have predicted that?
Beyond my disappointment, I remember thinking “what if I got the hole in one? What if several of us got a hole in one?” I was wondering how costly it would be to the dealership if they had to give away several fully-loaded trucks. So I asked at the club house.
“We have hole-in-one insurance, so it’s no biggie” the dealership rep told me. Bewildered, I learned they had bought an insurance policy for a few hundred dollars that would pay for any expenses in the event of a hole in one. It was interesting to see that in the unlikely event they had to shell out $60,000 for a new truck (or trucks), it would only cost them a few hundred dollars.
Obviously insurance is a well-known, well-used product for many areas of our lives. But in business, you can really insure against anything if the actuaries can predict the likelihood of a loss event. Like the odds of a rookie golfer scoring a hole in one and landing a fully-loaded Dodge Ram.
So the very long-winded lesson here is that lenders need to be thinking of assurances. Your underwriting is the first line of defence against loss. So, too, is your diversification. Spreading risk across multiple borrowers or loan types assures investors that one loss doesn’t kill the entire operation. But the best assurance is insurance.
You’ll have errors and omissions (E&O), general business insurance, key person insurance, etc. But products like portfolio loss insurance (any fire/flood/damage on a subject property being insured in case the borrowers insurance lapses) are an incredible place to start looking further.
We sat down with Robert DeRose of PROLINK Insurance to discuss just this. They work with MICs and other lenders on a regular basis to ensure that portfolios are covered against catastrophic downsides. After all, there’s no sense in running a well-underwritten portfolio if an external threat can still cost hundreds of thousands, if not millions, of dollars.
If you’re just starting out, it can be costly to insure against every single possible outcome, so it’s best to stick to the big ones (like portfolio loss insurance). Then, as your business grows more robust, have an advisor point to key vulnerabilities in your operation. We at DabbleCap can help point to these vulnerabilities. They don’t always show themselves until there’s a lot of damage done.
I have never scored a hole in one. I may never score a hole in one. But someone did. Given enough exposure, the critical event always has a non-zero chance of happening. Protect yourselves.
**This newsletter segment is under the “For Lenders” section of the Dabble Capital Advisory Newsletter. If you are looking for different information on the mortgage market, be sure to subscribe to the right channel - For Borrowers, For Investors, or For Brokers. We’re building a community at DabbleCap and we invite you to learn and contribute.**