Another revenue stream

Nowadays, premium finance is considered to be an essential business tool for insurance brokers and has a range of benefits for brokers and their clients.

Simon Pearce, development manager of Premium Credit, says: "The products offered by premium finance providers are almost homogenised nowadays. Where premium finance providers differentiate is with regard to service/distribution channels and price."

Premium finance can assist in the management of brokers' cash flow, says Pearce. The timely receipt of premiums will become even more important after the Financial Services Authority regulates the industry and, as a result, there will be further penetration by premium finance providers.

Kevin O'Flanagan, managing director of Aascent, says: "Premium finance offers brokers potential for another income stream as they can receive commission on premium finance. It also takes the credit control issue away from brokers. If the client fails to pay, the premium finance company does all the work and has assumed the credit risk."

In addition, there exists the advantage of being able to offer funding for a range of insurance products from a number of different insurers with a single monthly payment. Bob Darling, managing director of Singer & Friedlander Insurance Finance, says: "This is a vital differentiator when comparing premium finance to the finance schemes of the insurance companies themselves. And this is especially powerful in commercial insurance where a company is likely to use a number of different insurers for their insurance needs - from fleet and property cover to professional indemnity."

Darling advises brokers to look for a provider that gives them the flexibility of increasing or decreasing the commission-earning rate depending on the nature and sensitivity of the deal. This enables brokers to keep business that they might otherwise lose to a cheaper alternative.

He says: "Given that insurers will occasionally reward brokers with discounts if they pay the premium quickly, brokers can also gain by opting to be paid by the premium finance house earlier than the standard 28 days. This provides them with the funds to pay the insurer and the ability to negotiate a discount on the premium.

"Premium finance also gives brokers greater control over their cash flow. Clients pay at their convenience, whereas the better premium finance companies can be flexible. This allows brokers to manage payment warranties from insurers and their own cash flow. And, depending on the requirements of the business, brokers can juggle income from overriders with cash flow and investment income with very positive results."

Premium finance also offers a range of benefits for brokers' personal and commercial clients. Premium finance is an ideal way for clients to spread the load of insurance premiums, says Darling. "With the prospect of bank interest-rate increases on the horizon, it provides a more attractive financing option than a bank overdraft. And, in the area of business insurance, this has considerable advantages."

Tim Wilson, formerly managing director of Alexander Forbes Risk Services UK Retail Division, took over as sales and marketing director at Close in September this year. As a former client of Close he has seen first hand the benefits provided by premium finance.

Wilson agrees it is an important facility, as businesses need to cover the cost of very large premiums, which sometimes can be tens of thousands of pounds. He says: "Insurance premiums can be a tough one-off cost for a business to swallow. By financing the premium cost, you can actually spread the cost of your insurance over much more manageable, monthly repayments. This is an easy sell for brokers to their clients."

O'Flanagan says: "Third-party premium finance converts a prepaid insurance premium into working capital that the brokers' clients can invest elsewhere in their business or assist in cash-flow management. For the client it is relatively inexpensive compared to bank borrowing and it does not use up their bank facilities/lines of credit. In comparison, insurers' premium finance schemes are relatively expensive."

In particular, Wilson believes the latest technology used by premium finance providers can significantly help brokers reduce their administration costs.

I-prompt

Close's web-based account management system, i-prompt, has developed into a financial management tool for brokers. It enables them to log in any time to see when a client's policy is due for renewal and how far behind the client may be on payments.

Wilson says: "I-prompt can actually function like an early warning system for brokers in cases where things are going wrong. Although some premium finance companies update this every couple of days or so, i-prompt is updated in real-time. And this helps beat one of brokers' biggest headaches - policy cancellations and payment defaults. If a client defaults on a payment or they cancel a policy - the broker is all too often the last to know.

"Because i-prompt is a real-time online account management tool, it alerts brokers to any default when it happens. Brokers benefit by being able to act more quickly to recover funds."

In addition to distribution online, Premium Credit has invested in integrating with software-house back-office systems to allow brokers to submit business electronically through their back-office systems.

Cancellation and change of policy

Premium finance agreements are also flexible with regard to policy changes, according to O'Flanagan. He says: "If the policy is changed, for example, with mid-term adjustments where the premium can go up or down, most premium finance agreements include clauses that provide for the payments to increase or decrease automatically as a seamless transaction. The broker does not need to get involved apart from advising the client and the premium finance company on the change to the premium."

Policy cancellation and change of policy can vary according to the circumstances, according to Darling. He argues the key to making the most of premium finance and covering most eventualities is for brokers to work with flexible finance providers. He says: "They need to look for a provider who offers the best combination of service, efficiency and systems to suit the individual needs of their own business and that of their clients."

Pearce says most premium finance providers securitise their loan through securing a written agreement with the client and/or through the security inherent within the insurance policy. "If the policyholder were to cancel the policy half way through, the premium for the unexpired portion of the policy would be returned by the insurer to the broker. Then it is passed on to the premium finance provider - so the broker would not be at a loss."

He adds: "If the premium were to increase or decrease during the life of the policy, the broker simply lets us know and we can make adjustments accordingly and the client does not have to fill out any new forms."

Wilson argues one of the greatest concerns about premium finance for brokers right now is the massive shake-up going on in the premium finance market. He says: "Many brokers are not even sure that the premium finance providers they recommend to their clients one week will still be there in a month or two. Imagine, if you are a broker, how difficult it would be to tell a client that the premium finance provider you were recommending last month no longer exists.

"We are also beginning to hear murmurs of concern from brokers right now who are worried that some premium finance providers may start cross-selling other insurance products to their clients. Apparently, this is a more common practice in the US."

He points to the fact that Close Brothers Group is a blue-chip City name listed on the FTSE4Good index and, with 27 years in premium finance, argues it is a name that brokers can trust.

An example of the shake-up is Singer & Friedlander's recent acquisition of Benfield. The deal was a non-cash transaction - in return for its 100% holding in Benfield, Benfield has received a 25% share holding in Singer & Friedlander.

Business will continue as usual for both companies for the course of the transition. Ultimately, the Benfield name will be lost and its product offerings combined. As a result of the deal, Singer & Friedlander have gained the Benfield electronic data interchange platform and Singer & Friedlander non-recourse products will be on offer to Benfield clients for the first time.

Protection from bad debt

Darling says: "Premium finance protects the broker from bad debt. We do not feel it is necessary to provide insurance for the insurer failing.

In personal lines, the customer is protected by the Policyholder Protection Fund and the broker is protected if it has a non-recourse agreement. In commercial, the broker is normally protected by a non-recourse agreement."

Aascent is the only premium finance provider with a product that covers all instances of insurer, broker and client failure. O'Flanagan says: "We have credit insurance that protects the client, broker and ourselves should an insurer fail. There is no comeback for example as when Independent failed and premium finance companies pursued their commercial clients as they were legally entitled to."

"If the client fails we also have credit insurance, although we would return premiums from the broker in certain instances where the policies are pro rata, any shortfall being made good by our credit insurance. With regard to personal lines, if the insurer were to fail the Financial Services Compensation Scheme would pay 90% of the loss.

With a number of benefits for brokers and clients and protection for when things change or go wrong, premium finance is an essential tool.

However, choosing which provider brings the most benefits could prove a difficult choice.