Survival of the biggest

Ian Woodley, head of sales and marketing of new entrant Benfield Premium Finance, says that, like many of the larger specialists, Benfield has invested heavily in IT to provide the facility via electronic trading.

"The internet was innovative three or four years ago, but huge sums have been spent on building the connectivity that is compatible directly with a huge range of brokers' systems. Brokers, therefore, are offered a sophisticated and money-saving way of doing business at absolutely no cost to them," he explains.

However, Woodley cites historic and cultural reasons for brokers' caution in embracing electronic premium finance trading methods. "There is resistance, despite the business logic, which is partly down to a general resistance to change but also the failure of IT initiatives to deliver in the past.

The issue of personnel is a major sticking point for many brokers, as they feel uncomfortable cutting staff to gain business efficiency. There is a definite resistance to facing such issues, typically among smaller brokers, but we see examples of this in brokers of all sizes. It's a no-brainer in terms of business logic, but cultural issues prevent take-up."

Woodley considers this issue to be the single greatest obstacle to brokers accepting electronically traded finance facilities.

Point-of-sale finance

But, premium finance also affords brokers a selling technique, something that forward-thinking firms are embracing, according to Woodley. "With this point-of-sale finance facility, brokers are generally a bit behind the consumer finance market. With any domestic commodity item, people are told the cost in terms of monthly payments. Many more brokers could use this to their advantage."

Woodley also says: "Typically we see brokers that have not taken up premium finance in a big way, financing around 30% of their business while more forward-thinking firms finance between 60% and 70%."

In terms of competition, Woodley regards this to be becoming increasingly fierce. "We are a new entrant and, while Close Premium Finance and Premium Credit have predominant positions and try to price us and other new entrants out of existence, this is good for the market.

"There are around six firms worth talking about in personal lines premium finance. But, whether the market can sustain all of them is another matter and I expect some of these will be bought or merge in the future. The providers that are most under threat are those that have not invested in the IT to make the transaction a single seamless process, which they will need to do if they are to survive."

In terms of Benfield's longevity, he adds: "What we are doing is not revolutionary, it is a copy of what insurers did with electronic data interchange. And we can deliver significant cost savings to a broker."

In terms of the future of the premium finance market, Woodley considers that some insurers are already losing the appetite for the administrative burden that comes with offering flexible payments to clients. "Some insurers appear uneasy about having capital tied up in these operations as they only lose with overheads in offering flexible payments. While insurers obviously earn interest, this activity is non-core and, with specialists offering to cater for other ancillary products, the insurer option is becoming less attractive to brokers. As brokers are squeezed they can make money by offering to bundle a policy with add-ons, such as legal assistance and breakdown cover for a motor policy."

Simon Moran, sales and marketing director of Premium Credit, agrees that competition is fierce but, despite also agreeing that this is good for the market, considers there to be too many players. "Between the two main players, both ourselves and Close, we control 90% of market share and there are too many small players with too little to offer. In the 10 years I have been in the business I have seen 13 new entrants start up only to fall by the wayside."

Unlike Woodley, Moran considers penetration with both personal and commercial brokers to be good. While agreeing that his job is to keep out new entrants by being keen on price, he also believes IT is a key component in keeping brokers happy with its service. "While ensuring IT provides ease of use to brokers, this can also provide good management information. For example, a broker can see all the information about a client held by our system in Epsom. This includes how long transfers take, when a client pays and if there are any defaults in payment. This cuts the need for phone calls and this application frees up the brokers time to see clients, etc."

Regarding those brokers that only finance 30% of the business they transact, Moran does not agree that this is a cultural issue. "You have got to look at the reasons behind this as I don't think it is due to brokers' resistance to change. If a client is in a scheme with an insurer and being offered the advantage of interest-free credit, or if they pay upfront, brokers can not offer a third-party instalment plan."

Core business

However, Moran says that brokers' drive to find the best deal for their client, plus the incentive of earning commission on deals with specialists, is chipping away at insurers' offerings to clients. This pressure from specialists and brokers may well see insurers' provision of such facilities wane in future.

"We battle our way through brokers and, of course, we are more aggressive than insurers because this is our core business. Brokers can make money and negate the need for clients to have several direct debits going out every month as all aspects of cover can be catered for by a single payment and provider," Moran states.

Concerning the future of the market, Moran says: "We have a dominant market share. I do not consider the new entrants to have made much of an impact on that but the only way we will lose market share is if we foul up with the critical elements to maintaining a dominant position in this business. These critical elements are competitive pricing, the service element and having the right staff and investing in them."